57% of workers say saving for retirement is their top financial priority and close to 59% expect their standard of living in their golden years to be the same or even better. Yet Americans give themselves a C when it comes to preparing for retirement. Most Americans save under 5% of their after-tax income each year for retirement according to the U.S. Bureau of Economic Analysis.
How much will you need to retire? Everyone is different. Your answer will depend on your age, when you start saving, how you invest your money, when you plan to retire, the lifestyle you want and how long you expect to live.
According to RothIRA.com, 86 years old is the median age to which most people expect to live. Retirement may seem a long way away if you are in your 20s or 30s. When you are in your 40s and 50s, other expenses and priorities may be competing for those retirement dollars. Regardless of age or where you are in life, every little bit put toward retirement helps. Even if your retirement savings are not where you want them to be, with some thoughtful planning and some sound advice, you can get back on track to achieve the retirement lifestyle you hope for.
In addition to saving for retirement, don’t forget the crucial role investing and asset allocation play in your overall financial plan. A well-thought out asset allocation strategy can improve the chances of success in having adequate retirement assets. As circumstances shift and change over time, it is a good idea to revisit and reassess your goals and level of risk at each phase of your life. You have been working hard to save, now make your money work for you.
The following are some suggestions on what you should be saving at each phase of life, and some useful tips anyone can use regardless of their age or personal situation.
The “World Is Your Oyster” 20s
15% or More of Your Salary Annually
At this age, perhaps you are traveling and exploring life before settling down or just getting on your feet professionally. You may be grappling with student loans (with the average college graduate holding $28,950 in debt), paying rent or even buying a house.
Retirement may seem like a distant thought, but this is a critical time to start laying the groundwork to take advantage of the power of compounding (when your earnings generate even more earnings). For example, if you invest $10,000 today at eight percent, you would have compounded over $100,000 in 30 years. Additionally, contributions to a 401(k) and some types of IRAs can reduce your pre-tax income and, therefore, your federal and state income taxes. So, you may be rewarded with a lower tax bill while building toward your retirement savings goals.
How much should you contribute to your savings? One suggestion is to make sure your lifestyle expenses do not exceed 75% of your gross income and aim to put the rest away, through 401(k) contributions or in other investment or savings accounts. Many company 401(k) savings plans offer matching contributions, so you should consider participating in the plan at least at a rate that is sufficient to obtain the employer match. Another strategy is to start saving 15% or more of your salary specifically for retirement and increasing that by 3% per year, or the average cost-of-living raise amount at U.S. companies.
Even though you are just starting to save, what you do with your savings and how you invest the money is something to think about at this early stage. It is never too early to create an optimal asset allocation no matter the amount in your accounts.
The Complicated 30s
1x Your Salary (Early 30s) and 2x Your Salary (Mid to Late 30s)
In your 30s, you may own a house, be married, have childcare expenses or other financial obligations. You may have hit your stride when it comes to earnings or maybe no longer working outside the home. Regardless, it is important to keep those retirement contributions going if possible. You have 25-35 years to make the market and compounding work for you.
Good metrics to strive for: have your average annual salary (including interest and matching employer contributions) saved for retirement by the time you reach your early 30s, and have two times your average annual salary set aside for retirement by the time you are in your mid to late 30s.
If you are maxing out your 401(k), or your employer doesn’t offer one, consider contributing up to $5,500 to a Roth or a traditional IRA. With the former, you won’t get a tax deduction now, but you will be able to withdraw the money tax-free in retirement when you could likely be paying more taxes on other withdrawals from retirement accounts. A traditional IRA, conversely, would offer tax-deductible contributions now. Talking with a financial professional can help you decide which is best in your particular situation and what steps, and types of accounts and investments to invest in to achieve the kind of retirement savings you’re after.
High Performing 40s
3x Your Salary (Early 40s) and 4x Your Salary (Mid to Late 40s)
People often hit the top of their financial performance in their 40s. You may be paying for college and/or have a mortgage. But don’t neglect to pay yourself first—as it’s likely that there will be no one else to finance your retirement. This is the time to be putting away as much as you can.
If you are married and both you and your spouse have company 401(k) plans, you may want to consider which plan offers better employer matching contributions and has better performing investment options and seek to maximize your contributions into this plan.
Ideally, you should strive to have three times your salary saved in your early 40s and four times your salary by the time you are in your mid to late 40s. While this may seem like a lot, your own contributions, market returns, and compounding are hopefully helping you to accumulate these savings.
Now that you have accumulated more savings, don’t forget to revisit your allocation strategy, reassess your goals and adjust your plan accordingly.
6x Your Salary
Perhaps you are caring for aging parents, reducing your full earnings potential or maybe you are remarried or dealing with the costs of a divorce. With retirement possibly ten to fifteen years away, it may seem more real, and you might want to redefine your goals on your salary, expenses and what resources you will need for the future. Think about where you are financially and what you expect retirement to be—do you envision continuing to work full-time or part-time? Pursuing expensive hobbies? Vacationing more? Moving?
Come up with a concrete budget and review it. You’ll also need to consider health care costs and potential speed bumps. You may want to revisit your portfolio and evaluate your overall level of investment risk and allocation between stocks, bonds and cash. If you still have multiple accounts, now is the time to consolidate to make it easier to see the big picture.
In your early 50s, you should aim to have about six times your annual salary saved. If you are not there yet, even if you’ve been making full contributions all along, your financial advisor can help put a plan in place to catch up. It might include “catch-up contributions.” Starting at age 50, you can put up to an extra $6,000 per year in your 401(k) for a $24,500 maximum or an extra $1,000 in your IRA, for a total of $6,500 a year.
Retirement Stretch 60s
8x Your Salary (Early 60s) and 10x Your Salary (by 67)
Even though college loans and mortgage payments are hopefully behind you, you may still be paying off other expenses. Hopefully, this is the home stretch to make sure you are where you need to be to enjoy the golden years. Reevaluate your retirement budget to make sure you are on track.
One guideline is to make sure you have eight times your annual salary saved in your early 60s and ten times your salary to retire by 67. Few people actually spend less than they anticipate in retirement. It’s also a good time to reassess Social Security, pensions, retirement accounts and other savings. Although you can start taking Social Security at 62, the monthly benefit increases each year you wait until age 70, so you will need to determine when is the best time for you. Since determining when to take Social Security is complicated and typically cannot be undone, you should consult with a financial professional to review different scenarios before making any decisions.
Regardless of age, consider a few suggestions.
- Make sure you contribute to your 401(k) at least the maximum amount of your salary your employer will match in order to benefit the most.
- Put a plan in place to save and invest now. If you don’t plan for it, the greater the temptation to spend.
- Make saving automatic—having retirement contributions deducted from your paycheck and invested into your retirement account requires less thought, forces you to save and can help to ensure you are living within your means.
- Avoid keeping up with the neighbors—everyone’s situation is different, and what might be (or look) right for your friends may not be a good move for you.
- Invest your savings wisely. Understand the important role that asset allocation can play in your retirement planning by looking at the risks and rewards of different asset allocations.
If you are not there yet or are concerned that you are not saving enough, then the time to address this is now. The more time you have to adjust your course, the greater the likelihood that you will achieve your retirement goals. Sit down with your financial advisor to see where you are at and put a plan in place to catch up.
If you have questions pertaining to your financial situation, please contact us. We welcome the opportunity to help you achieve your long-term financial goals.
The information above is general and educational in nature and should not be considered legal or tax advice. GW & Wade cannot guarantee that this information is accurate, complete, or timely.
A suggested salary multiplier is not a guarantee of future results; it does not reflect the return of any particular investment or take into consideration the composition of any client’s particular account. The salary multiplier is intended only to be one source of information that may help to assess retirement income needs. Past performance is no guarantee of future results.
Retirement savings factors are hypothetical illustrations, do not reflect actual investment results or actual lifetime income, and are not guarantees of future results. Targets do not take into consideration the specific situation of any particular client, the composition of any particular account, or any particular investment or investment strategy. Individuals may need to save more or less than the savings target displayed depending on their retirement age, life expectancy, market conditions, desired retirement lifestyle, and other factors.
We make no warranties with regard to the information presented above or results obtained by its use. Always consult an attorney or tax professional regarding your specific situation.
Clients of the firm who have specific questions should contact the GW & Wade Counselor with whom they regularly work. All other inquiries, including any inquiry concerning a potential advisory relationship with GW & Wade, should be directed to:
Laurie Gerber, Client Development
GW & Wade, LLC781-239-1188