How much money would you need to never have to work again? Helping people like you answer that question is what I spent most of my time figuring out for clients as a financial advisor.
With company pensions going the way of the dodo bird and Social Security feeling more and more like Social inSecurity, we’re increasingly responsible for creating our own financial safety net for retirement. But figuring out how much money we need to retire can take some work.
One rule-of-thumb is that saving 10%, 15%—or better yet 20%—of your income, steadily, for 30 to 40 years should get you the nest egg you need.
Or you can go with age-based guidelines like these, developed last year by Fidelity Investments:
At age 35, you should have saved an amount equal to your annual salary.
At age 45, you should have saved three times your annual salary.
At 55, you should have five times your salary.
At 67, when you retire (under these guidelines), you should have eight times your final salary saved.
While these provide good guidance, retirement planning is fraught with unknowns that should be factored in. That’s why I recommend estimating a retirement range, rather than sticking to a set-in-stone number.
You should address the obvious questions, of course, like: When do you want to retire? How much income do you think you’ll need in retirement for the lifestyle you want—and for how long? How much do you expect to receive from Social Security? If you keep saving at your current rate, how much will you have?
Then there are less obvious questions:
Are you planning to pay for college and if so, how much and when?
Do you anticipate having to care for elderly parents or dependent children later in life?
Do you have health problems now that are likely to generate bigger expenses as you age?
How much money do you want to leave behind when you die?
Once you’ve answered questions like those above, adjust your retirement targets accordingly.
Considering the potential variables, your target savings range could also be wider than you initially thought. One easy way to get a sense of your range is to run multiple scenarios with an online calculator using three different assumptions for an average annual rate of return on your retirement investments—2%, 6% and 10%—which can represent the worst, average and best-case scenarios. If you’re uncomfortable with the worst-case scenario, you should get comfortable with the possibility of retiring later, living on less in retirement or sacrificing a little more now to have more for the future. You can use the online calculators to see how setting aside more could affect your results.
Luckily, small adjustments now can make a big difference down the road. Consider this: If you have $10,000 currently saved and increase your monthly contribution from $500 to $1,000, in 25 years you will have nearly $350,000 more saved! (That’s assuming an average annual return of 6%, compounded monthly.)
Pick a guideline that you are comfortable with and save as much as you can in tax-advantaged retirement accounts. Then, automate your savings whenever possible and take comfort in the fact that you have plenty of company in the fight for future security.
DailyWorth’s Resident Financial Advisor Jocelyn Black Hodes will be co-leading our next session of Money Clarity, our 4-week program to help you get your finances under control, which begins April 3. Learn more about Money Clarity.