If you are saving for your retirement, it is useful to know how a lot of and whether you are on the right track. Everyone’s situation is different, of course, but there are some helpful retirement benchmarks that can give you an idea of how you’re doing in achieving your goals.
After comparing your numbers to the benchmarks, you can work on making the necessary adjustments and then check your progress regularly.
To set your retirement savings benchmark, you need to consider two factors: how much you’ve already saved for retirement and your current age. Then compare your savings to your current gross income to start setting savings goals based on your income.
What is a charity for retirement savings? Many financial institutions and experts have some guidelines to answer that question.
Read: The most important predictor of the financial security of your pension
Retirement Saving Guidelines
For example, Fidelity Investments has developed the following set of benchmarks based on ages for the over-50s and 60s:
|Current age||Ideal amount of retirement savings required|
Equivalent to 6 times annual salary
Equivalent to 7 times annual salary
Equivalent to 8 times annual salary
Equivalent to 10 times annual salary
Another benchmark concept: Aim to replace nearly 80% of your current annual income after retirement so that you can maintain your lifestyle once you retire.
The great unknowable is of course how long you still live and how long your savings will last? For an estimate, try the The Social Security Administration’s Life Expectancy Calculator. Here’s an example using the 85% rule and life expectancy estimates:
Suppose you were born in 1970 (you are now 51) and want to retire at age 67 so that you will retire in 2037. And let’s assume your annual income is $40,000. If you expect to live another 20 years after retirement, you need ($32,000 x 20) = $640,000 in retirement savings.
Be sure to read: What inflation means for your pension
The 4% rule for withdrawing pension
Another commonly used benchmark, to help you determine how much of your retirement savings you can afford to withdraw each year after retirement, is “the 4% rule.” As the name implies, it suggests that you withdraw 4% of your retirement balance annually (adjusting for inflation after the second year).
For example, if you have $1 million in retirement savings, you would withdraw $40,000 in the first year, and from year two it would be $40,000 plus inflation.
For years, the 4% rule was considered an excellent margin for ensuring that pension funds last about 30 years.
But lately, financial experts like Wade Pfau, a professor of retirement income at the American College of Financial Services, say this rule needs to be amended because of the current low interest rates and the possibility of inflation.
Learn more: Is a bucket strategy superior to the 4% rule?
With a 4% withdrawal rate, they note, you could run out of money in 30 years. Instead, under current economic conditions, they recommend more than 3% per year.
David Blanchett, head of pension research at Morningstar MORN,
Investment Management, said on CNBC, “3% is the new 4%.”
Allan Roth, a certified financial planner at the consulting firm Wealth Logic in Colorado Springs, Colorado, also believes in the 3% rule. And he has said, “There are many other factors built into low-risk take-up rates. Age, health, life expectancy, and the amount of guaranteed monthly income from sources like Social Security and pensions are also important considerations.”
Some financial advisors also say that the 4% rule can be too risky for some people because it assumes you hold a portfolio of 50% in stocks and 50% in Treasury bills.
The 3 A’s of retirement savings
When determining how much to save, it also helps to consider the 3 A’s of retirement savings:
- Amount: Experts recommend saving at least 15% of your pre-tax income annually, if you can
- AccountConsider your other sources of retirement income, such as Social Security benefits, employer pensions, investment and retirement accounts such as 401(k)s and IRAs, and any income from part-time employment
- asset mix: The higher the percentage of your retirement savings in stocks, historically, the higher the return of your portfolio will be
If you find you’re off track after taking a shot at these benchmarks, don’t lose hope either. Focus on what you can do to get back up to speed. That could mean upgrading your annual savings, opening or financing a retirement account, investing less conservatively, or using a Health Savings Account to save for retirement and medical expenses.
Learn more: Get three times more tax breaks with an HSA and find an affordable health plan while you’re at it
Hiring a good financial advisor can also be helpful. That professional can show you ways to get on track and work with you to keep it going.
Lyle Solomon is a licensed attorney in California. He has been associated with law firms in California, Nevada and Arizona since 1991. As lead attorney for: Oak View Law Group, he gives advice and writes articles to solve their debt problems.
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