When the topic of retirement comes up in conversation, the million-dollar question (literally) is how much should I save for retirement. While there is no single right answer, there is plenty of solid guidance available to help you figure out what’s right for you.
Two Questions to Ask When Calculating How Much to Save For Retirement
The two primary factors in determining how much you should have saved at retirement are:
- Your age when you want to retire
- What type of lifestyle you want to maintain in retirement (i.e., how much will you spend)
The answer to these two questions will help determine how much you need to save. If you want to retire young and live a lavish lifestyle of luxury, traveling the world and eating out every night, your savings number will need to be high. However, if you postpone your retirement, and live a more modest lifestyle in retirement, your savings can be much lower.
The retirement savings calculation can be complex and overwhelming. Because of this, it’s easy to avoid making decisions and postpone your savings. However, the key to a sizeable nest egg is to start saving as early as possible. Take action now.
Using Benchmarks to Calculate Your Retirement Savings
To make the retirement calculation as easy as possible, I prefer to look at how much I should save, and have saved, for retirement based on my age. I like to look at age and salary benchmarks provided by reliable brokerage firms and base my monthly savings on their guidance.
Here are three firms and their recommended saving benchmarks:
Fidelity’s approach is to save 10 times your salary by age 67. They have several age benchmarks defined to help you determine if your savings are on track. For example, they recommend you have at least one times your annual savings at age thirty, and six times your annual savings by age 50.
T Rowe Price has similar age benchmarks. However, they combine their age requirements with the anticipated source of your retirement – whether through personal savings, or a mixture of pension and personal savings. Their general advice is to have 11 times your annual income saved for retirement by age 65.
JP Morgan has a detailed retirement guide available on their site, including a savings rate based on current age and annual income. For example, if you are age 45 and just beginning to save for retirement, and your current income is $70k per year, the recommended savings is 27% of your annual income per year.
Remember these benchmarks are not hard and fast rules to live by. Rather, they are rules of thumb. Personal finance is personal and depends on the circumstances in your life. If you find it impossible to save 22% of your income at this point. Determine how much you can afford and start there. Then, adjust as you go.
How To Increase Your Retirement Savings
Over time, increase your savings percentages. Some painless strategies to do this include:
- Take advantage of your employer’s automatic rate increases, if they offer them
- Any time you receive a raise, apply the increase in pay to your retirement
- Send your tax refunds directly to your retirement account
- Send your annual bonuses to your retirement account
- If you change jobs and receive a larger salary, save the difference directly to your retirement account
Should You Change Your Retirement Savings Strategy?
Revisit your retirement savings regularly. Life changes, as do retirement lifestyle preferences. As they change, so will your retirement needs. For example, when I first started saving for retirement, I didn’t plan to have children. Now I have two children. After the birth of my second child, I chose to decrease the amount I saved each year and funnel that money towards my day-to-day expenses.
However, I always planned to travel extensively when I retired. In the past five years, my family decided we’d rather travel now while we’re younger and to give our children a more worldly experience, so I’ve decreased the amount I need in retirement.
What are your retirement goals? Are your savings on track with your goals? Let us know in the comments below.