There’s no magic number for how much to save for retirement, but there are key guidelines that will keep you on track to meeting your goals.
It’s a great idea to track your retirement-plan progress against the guidelines established by financial planners. Unfortunately, there’s no single dollar amount that everyone can use for goal setting. However, there are time-tested rules that you should keep in mind to develop your own savings and investment targets.
Stay focused on cash flow
You need to be familiar with retirement account distribution strategies to understand how much you need to have invested at various ages along the way. Financial planners establish retirement-savings goals based on income replacement. When you stop working, you need to rely on cash flow sourced from investment accounts.
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The 4% rule holds that retirees can safely distribute 4% of their total savings each year without running out of money. Withdrawing any more than that increases longevity risk, since there’s a high chance of outliving your assets if you spend too much. This rule also allows you to make a critical calculation. If you know your cash-flow requirements, then you can determine the investment-account balance necessary to meet those needs
To maintain your lifestyle in retirement, advisors estimate that you need to replace approximately 75% of your earned income.Retirees don’t have a savings burden and often enjoy lower effective tax rates thanks to the tax treatment of Roth accounts, Social Security benefits, government bonds, and qualified dividends. As a result, most people can comfortably get by with slightly less income in retirement.
Calculating retirement-savings goals
Those guidelines reveal important considerations for financial planning. First, the amount you should have invested depends on your income, and it varies from person to person. There’s no single, universal goal, but there are clear-cut rules that everyone can apply to their personal plan.
Second, the amount you need to accumulate by age 50 is determined by the amount required to meet your eventual cash-flow retirement needs. At age 50, there’s still time to save money and achieve investment growth. However, that time is limited. If you are off track by too much, you will struggle to catch up.
According to planning guidelines, someone with annual earnings of $75,000 before retirement would need $56,250 in cash flow to maintain their lifestyle. The 4% rule suggests that $1.4 million is required to generate $56,000. Fortunately, most people have cash-flow sources that reduce the burden on their investments. The average Social Security benefit is around $20,000 per year. Going with the above example, you would only need $905,000 to generate $36,250 each year in compliance with the 4% rule.
That’s a great example of the math that supports the general guidelines. Financial planners often suggest that people have 10 to 12 times their annual salary saved upon entering retirement. That number isn’t arbitrary; in the above example, $900,000 is 12 times $75,000.
The average 50 year old has approximately 15 years to finalize building those assets, and planners often recommend that people have retirement investments totaling six times their annual income by age 50.
For someone making $75,000, that would be $450,000. If that person contributes 6% of their annual income to that account for 15 years, and the account averages 6% annual growth, then the account would grow to nearly $1.2 million by age 65. That would provide roughly $47,000 of annual income on top of any potential Social Security benefits.
| AGE | INVESTMENT ACCOUNT BALANCE |
|---|---|
| 50 | $450,000 |
| 55 | $627,568 |
| 60 | $865,195 |
| 61 | $921,607 |
| 62 | $981,403 |
| 63 | $1,044,787 |
| 64 | $1,111,975 |
| 65 | $1,183,193 |
| 66 | $1,258,685 |
| 67 | $1,338,706 |
Make it personal
Those are obviously generalized suggestions. If you plan to retire early, you might need savings equal to eight or nine times your annual income. Alternatively, someone planning to work until their full retirement age (FRA) at 66 or 67 could get away with fewer assets accumulated if their savings rate is high enough.
Retirement-savings targets are useful guidelines for different ages, and it’s a reliable framework based on math and data points from millions of retirees. However, it’s still essential to understand the methodology and adapt it to your situation.
More than anything else, it’s important to develop measurable financial goals and track your progress toward them. Fifty-year-olds don’t have much time for a major course correction. There aren’t multiple decades of future earnings to fuel your plan with cash flows, and portfolio allocation should shift away from growth stocks to manage volatility as your investment time horizon shrinks. Most of the work should be done before age 50, with the following years dedicated to housekeeping and applying the final touches.
