How Much Should You Have in Retirement Savings Right Now?
Savings benchmarks to help you stay on track for retirement
The amount you need in retirement savings is one of the most challenging questions because the answer is always that “it depends!”
This abstract answer can be frustrating for investors who are seeking a magic number to help them decide whether they are on track for retirement. There is already considerable uncertainty surrounding retirement planning. In general, 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.
But personal retirement plans are meant to be just that—personal. Lifestyle choices go a long way in determining how to create the most accurate estimate of your future income needs and wants. Your current health, life expectancy, and mortgage or consumer debt can drastically change your future retirement income needs.
Given all the unique variables and uncertainty regarding how much you should have in savings to achieve a high probability of success, it makes sense to follow some general retirement savings benchmarks to determine whether you are on track for retirement.
Remember, when you're young, saving and investing for retirement should be a long-term strategy. The money in your 401(k) and IRA may be invested in various securities, such as stocks, bonds, ETFs, and more. While the market may be volatile at times, historically it has seen positive gains in the long run. Keep these benchmarks in mind, but don't panic if you see your retirement account dip. Keep the long-term in mind.
Retirement Savings Benchmarks
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 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 establish savings goals that are based on multiples of your income and then track your progress for retirement throughout the accumulation stage of your career.
Fidelity has identified retirement saving factors for various ages along the journey towards retirement. For example, to retire with a comfortable lifestyle, the financial services company recommends that you save 10 times your annual salary by age 67. It also provides a timeline with benchmarks to use to achieve the recommended amount of retirement 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 average lifestyle during retirement. Through Fidelity's retirement savings widget, you can obtain an adjusted savings factor based on your age, when you plan to retire, and your anticipated lifestyle in retirement.
For instance, a 45-year-old planning to retire at age 67 with an average lifestyle might set a target retirement savings of four times his salary. However, adjusting the retirement age to 65 in a similar scenario bumps the savings factor up to six times the salary. If the investor desires an above-average lifestyle, he should use a savings factor of seven times his salary to establish his target retirement savings.
Assess your savings factor based on your current age, when you want to retire, and your desired 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 lifestyle during retirement. This means that if you make $50,000 a year before taxes, you would need about $40,000 a year in retirement to maintain your pre-retirement lifestyle.
You can then use that annual figure to estimate roughly how much you should have in retirement savings based on when you plan to retire and your life expectancy. Using the Social Security Administration's Life Expectancy Calculator, for example, a female who is born in January 1960 and plans to retire at 67 can expect to live for approximately 20 more years after her planned retirement age. If she multiplies her life expectancy (20) by her annual expected replacement income ($40,000), she can determine that she needs around $800,000 in retirement savings to achieve her goals.
Retirement Savings Based On Withdrawal Rate
Another commonly used 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 and increase the amount with inflation each year to arrive at an amount that will last you approximately 30 years.
By that rule, for every $10,000 per year you want to spend in retirement, you will need approximately $250,000 in savings ($10,000 divided by the annual withdrawal rate of 0.04). For example, you would need approximately $1 million in retirement savings to annually withdraw $40,000.
Staying on Track With Retirement Benchmarks
Once you establish a retirement savings amount based on one of these guidelines, aim to annually save enough to meet that goal.
The U.S. Department of Labor Savings Guide provides Worksheet 4 for estimating the specific percentage of income you'll need to save every year to meet your retirement savings 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.
- Calculate your target savings rate: This is the percentage of your salary that you need to save each year to meet your retirement goal.
Review your retirement savings estimate every year or two to account for changes in your income or anticipate 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.
However, it's important to recognize that these savings benchmarks are simply milestones and operate as somewhat of a moving target. A successful retirement plan requires more than a one-size-fits-all approach.
The best way to determine if you are saving enough for retirement is to run a more detailed retirement savings estimate using a retirement calculator and then create a budget plan for retirement based on realistic lifestyle expense needs. This will allow you to review your entire financial picture and include your personalized Social Security estimates, the potential use of the equity in your home, desired income ranges based on your goals, and other income sources, such as inheritances, part-time work, or rental income.
U.S. Department of Labor Employee Benefits Security Administration (EBSA). "Savings Fitness a Guide to Your Money and Your Financial Future," Page 1. Accessed March 20, 2020.
Social Security Administration. "The Future Financial Status of the Social Security Program." Accessed March 20, 2020.
Stanford University. "The 4% Rule—at What Price?" Page 2. Accessed March 20, 2020.