How Much Do I Need to Save for Retirement?
MONEY TALKS - Recently there was some uproar on Twitter over an article posted by the financial news website MarketWatch.com. The feature referenced a Fidelity column stating how people should have twice their annual salary saved by the time they are 35 years old. The majority of Twitter followers felt this was a completely ridiculous target and were not shy about mocking the concept. Many millennials were angry with these unrealistic expectations given the current cost of housing and record breaking student debt. While having twice your salary saved by the time you’re 35 may be a lofty goal, the crux of the article was really to evaluate where you stand and begin taking stock of your future by the time you reach your thirties.
No Magical Savings Number - Determining how much you need to have saved for retirement is nearly impossible to answer because everyone’s facts and circumstances are different. A married couple with no mortgage, two pensions, and Social Security benefits probably doesn’t need much saved for retirement. Likewise; an individual still renting, with no pension, and minimal Social Security benefits probably needs a significant nest egg to support his or her retirement needs. Since there is no magical savings number, for arguments sake, let’s go with Fidelity’s rule of thumb and aim for 10x your annual salary saved at retirement. The question that remains is; how much do you need to have saved at certain milestones in your life to reach your retirement goal?
Ground Rules - Before we get into the details, let’s start with the basic ground rules. Let’s presume you start working at 23 years old with a beginning salary of $50,000 that grows by 4% annually. You contribute 10% of your gross salary towards retirement via semi-monthly payroll deductions, and your investment return averages 7.5% per year. During your first year on the job you contribute $5,000 and earn $184 for an ending balance of $5,184. Your second year retirement savings has an opening balance of $5,184 plus $5,200 in contributions and $594 of earnings for an ending balance of $10,978. We’ll assume you rinse and repeat this process until you retire at age 65.
First Milestone - If we continue this glide path towards the retirement end zone, your first milestone comes at age 30. At 30 years old you are making over $65k, and your retirement nest egg should be approximately 1x your annual salary. In our example the ending retirement savings balance was just over $62k.
More Realistic Target - The next major milestone comes at age 37. Contrary to the MartketWatch.com article stating you should have twice you salary saved at age 35, we feel age 37 is a much more realistic target. While two years may not sound like much, the difference is staggering due to two factors. First off, you have two addition years of contributions. By age 36 and 37 you are earnings $83,254 and $86,584 respectively which amounts to almost $17k in contributions. Secondly, the two additional years of compounding produce over $23k in investment earnings. Thus, between contributions and investment return, your savings are over $40k higher at age 37 when compared to age 35. As you can see, saving twice your salary by age 37 is a much more realistic target.
Age Based Milestones - Inevitably the best way to reach your retirement goals is to save consistently and invest your savings appropriately throughout your lifetime. To help guide you along your path we’ve developed some age-based milestones to shoot for.
Not quite there? Consider increasing your savings contribution rate as your salary increases. Believe it or not, increasing your annual savings by 1% each year can have a dramatic effect on your savings portfolio over time. No matter where you stack up, it’s important to measure and track your progress. Working with a CERTIFIED FINANCIAL PLANNER™ may help you to better evaluate where you currently stand and what changes need to be made in order to reach your ultimate retirement goals.