The amount of money you need to have saved for retirement is a tough question. That's because the answer is always: "It depends."
This can be hard to hear if you're looking for a magic number to help you decide whether you are on track for retirement. There is often plenty of uncertainty around retirement planning. These days, people are living longer, health care costs are rising, pensions are disappearing. And a cloud of doubt surrounds what Social Security will look like decades from now.
- Retirement savings benchmarks are goals that help you figure out whether you’re on track for retirement.
- One benchmark is saving a multiple of your current income, such as six times your salary, by age 50.
- You can also set a goal to replace a percentage of your current income.
- The 4% rule is another benchmark; it means you could take a 4% withdrawal from your retirement savings each year and have it last 30 years.
Retirement Planning Is Personal
But personal retirement plans are meant to be just that: personal. Lifestyle choices go a long way in figuring out how to create the most accurate estimate of your future income needs and wants. Your current health, life expectancy, and any debts can drastically change your future income needs.
With so many different variables about how much you should have in savings, you can follow some general retirement savings benchmarks. These can help you find out whether you are on track for retirement.
When you're young, saving and investing for retirement should be a long-term game. The market may be volatile at times, but it historically has seen positive gains in the long run. Keep these benchmarks in mind, but don't panic if you see your account dip.
Retirement Savings Benchmarks
You can use one or more of these guidelines to assess how much you need to stay on course for retirement.
Retirement Savings as a Multiple of Your Income
One rule of thumb for how much you should have in your nest egg is based on savings factors that are linked to your age and income. Through this approach, you can make savings goals that are based on multiples of your income. Then, you can track your progress through the accumulation stage of your career.
Fidelity has identified retirement saving factors for various ages along the journey towards retirement. For instance, to retire comfortably, Fidelity recommends that you save 10 times your annual salary by age 67.
It also provides a timeline with benchmarks to help you achieve the recommended amount of savings needed to stay on track:
- By 30: Have the equivalent of one times your salary saved.
- By 35: Have two times your salary saved.
- By 40: Have three times your salary saved.
- By 45: Have four times your salary saved.
- By 50: Have six times your salary saved.
- By 55: Have seven times your salary saved.
- By 60: Have eight times your salary saved.
- By 67: Have 10 times your salary saved.
Keep in mind that the savings factors above are based on the average lifestyle. Through Fidelity's retirement savings widget, you can get an adjusted savings factor based on your age, when you plan to retire, and your future lifestyle in retirement.
For instance, let's look at the case of a 45-year-old man planning to retire at age 67 with an average lifestyle. He might set a target retirement savings of four times his salary. But changing the retirement age to 65 bumps the savings factor up to six times the salary. If he decides he wants an above-average lifestyle, he should use a savings factor of seven times his salary to come up with his target.
Assess your savings factor based on your current age, when you want to retire, and your future lifestyle expense needs.
Savings Based on Percentage of Pre-Retirement Income
Conventional wisdom says that you’ll need to replace around 80% of your current income in retirement to maintain your same way of living during retirement. This means that if you make $50,000 a year before taxes, you would need about $40,000 a year in retirement.
You can then use that yearly figure to guess roughly how much you should have in savings based on when you plan to retire and your life expectancy. Using the SSA's Life Expectancy Calculator, for instance, a woman who is born in 1960 and plans to retire at 67 can expect to live for about 20 more years after her planned retirement age.
If she multiplies her life expectancy (20) by her yearly expected replacement income ($40,000), she will find that she needs around $800,000 in savings to reach her goals.
Retirement Savings Based on Withdrawal Rate
Another common benchmark in retirement planning is the 4% rule. It refers to a general assumption that you can take a 4% withdrawal from your retirement balance annually. Then, you can increase the amount with inflation each year to arrive at an amount that will last you around 30 years.
By that rule, for every $10,000 per year you want to spend in retirement, you will need about $250,000 in savings. ($10,000 divided by the annual withdrawal rate of 0.04.) For instance, you would need around $1 million in savings to annually withdraw $40,000.
Staying on Track With Benchmarks
Once you set a retirement savings amount based on one of these guidelines, aim to save enough to meet that goal.
The U.S. Department of Labor Savings Guide provides Worksheet 4 to help you find out the percentage of income you'll need to save each year to meet your goal. The worksheet takes you through four steps:
- Estimate the amount of income you need in the first year of retirement.
- Figure the amount of savings you need at retirement. This is how much you will need to last you through retirement.
- Determine the current value of your savings at retirement. This is how much your current savings will grow by the time you retire.
- Find your target savings rate. This is the percentage of your salary that you need to save each year to meet your goal.
Review your savings estimate every year or two to account for changes in your income or and think about your lifestyle needs in retirement.
Use Caution With Retirement Savings Benchmarks
General benchmarks, such as Fidelity’s savings factors and calculations based on your expected replacement income or withdrawal rate, provide an acceptable starting point for determining whether you are on the right track with your retirement savings. For many people, the savings amount that these benchmarks reveal will serve as a healthy wake-up call about your retirement.
But it's important to know that these are simply milestones and can be somewhat of a moving target. A good retirement plan requires more than a one-size-fits-all approach.
How You Can Make a More Detailed Estimate
The best way to figure out if you are saving enough is to run a more detailed estimate using a retirement calculator. Then, you can make a budget plan based on realistic lifestyle expense needs. This will allow you to review your entire financial picture. It can also help you include your personalized Social Security estimates, the potential use of the equity in your home, and other income sources such as inheritances, part-time work, or rental income.