4%, 6%, or 10% of your income. Which number sounds good to you? Is saving for retirement just picking a number out of thin air, or do you put serious thought into it? Is it too little? Too much? All these questions! My guess is you probably aren’t saving enough for retirement.
All the numbers are too small
The numbers depend on who you ask, and neither answer is reassuring. Among Americans who actively contribute to a 401(k), the average savings rate recently hit a record high of 14%, according to Fidelity. That sounds promising until you consider what the Federal Reserve found: more than half of American households have no dedicated retirement savings at all. So while some people are doing well, the majority are starting from zero.
Think about the percentage of income you save for retirement. Do you even know? If you do, great, but how did you come up with that figure? Is it all you think you can afford? Do you contribute just enough to get a match from your employer? Your savings rate must be part of a much larger retirement plan.
What came first, the chicken or the retirement nest egg?
I must correct myself; your savings rate is not part of the retirement plan. It’s the result of your retirement plan. Most people do it backward. They begin saving, and when they get close to retirement, they visit their CERTIFIED FINANCIAL PLANNER™ professional to determine their retirement readiness.
Of course, beginning to save is a great thing. I encourage it wholeheartedly, but it’s much more effective after you’ve put some work in to determine your retirement needs. I don’t care if you’re 25. It’s not too early. Time is your ally.
It’s much easier to refine the plan as needed throughout your life than to decide five years before retirement to consider how much you’ll need to retire. Time is no longer your friend.
Can you handle the truth?
The golden years of retirement savings are over. Your parents and grandparents probably had what was typically referred to as the 3-legged retirement stool. The stool consisted of…
- Pension
- Retirement plan 401(k)/403(b)
- Social Security
On top of that, the chances are they probably worked for the same employer for the majority of their careers. Those days are over.
The truth is you’ll have to work a bit harder (to save more) and maybe longer. You most likely won’t work for the same company for 30+ years, and you probably won’t have a pension. You’re left with a two-legged retirement stool. Try sitting on that!
The monkey on your back
Unfortunately, you have one thing many of your parents and grandparents didn’t have: DEBT! According to the Employee Benefit Research Institute, 66.8% of families with heads age 55 or older carried debt in 2022. That is a dramatic increase from 53.8% in 1992, meaning more than one in four additional older families now carry debt into retirement compared to a generation ago.
So, your retirement stool has one less leg and holds more weight with the added debt burden. More debt and less savings are not a recipe for retirement success.
Here’s an example:
You are 25 years old, make $50,000 per year, contribute 5% to your 401(k), you get a 3% salary increase and 5% investment return annually. After 40 years your balance would be $495,856.
That sounds pretty good, but remember, in 40 years, if your salary increases by 3% per year, you’re making $163,101.89. If you need 90% of your income at retirement, that’s $146,791. That means you have saved up more than three years of your retirement needs.
Retirement could last 30 years. Even with Social Security, that savings won’t get you far.
What if the company matched 100% of your contributions up to 3%? Then, you would have $793,369. That’s better than $495,856 but not enough to get you through retirement.
Granted, that’s in a perfect world, and there are some assumptions you must take into consideration. That’s the point. The younger you are when planning for retirement, the longer you must refine those assumptions, make adjustments, and understand what you must do to retire.
Take retirement responsibility
No use whining about not having a pension. That’s not going to help save more for retirement. The reality is you need to step up your retirement game.
- Get your retirement plan in place early. That means understanding how much you will need, the kind of lifestyle you want, and how much debt you’ll have in retirement (try for none). This is how you’ll determine the appropriate retirement savings amount.
- Understand the options: 401(k)s, IRAs, annuities, and taxable accounts. Learn about all of them and how they may fit into your plan.
- Up the savings: If you get a raise, use a portion of that raise to increase your retirement savings. If you pay off a significant debt, use the newly freed-up cash to, you guessed it, increase your retirement savings.
- Be prepared not to retire on your terms. Don’t think it can’t happen to you. It’s much more widespread than you think. Build this into your retirement plan. Expect the best, prepare for the worst.
The bottom line
How much should you be saving? It depends on your current income and how much you’ll need in retirement. The typical recommendation for the “average” person is at least 10%. I believe even that’s too low. I recommend that you should be saving 15% to 20% of your pre-tax income if you want to retire at age 65, 66, or 67 (depending on your birth year)
Retirement may last 25 to 30 years or more. You may be retired for more years than you worked. That’s going to take a lot of income. You can’t just pick a savings amount and assume that that’s going to be good enough for retirement. You don’t want to approach retirement and find out you haven’t been saving enough.
If you need assistance determining your retirement saving rate, please schedule a complimentary consultation.
