We hear tons of advice about how much we SHOULD be saving, and where to save, but how do you know whether you’re on track if you got a late start to this whole saving thing?! Retirement planning calculators can give you false information because of all of the assumptions that are made because we all have different lifestyle goals, live in different areas with different salary levels.
Fidelity Investments have come up with a quick way to benchmark yourself as to where you should be based on your current age. Keep in mind that they have assumptions of their own including a retirement age of 67 and assume you start saving 15% of your income at age 25. If you’re getting a late start, find out where you should be based on their calculations and figure out how much additional you need to be saving each month.
Savings By Age
If you are 30 years old, you should have 1 year’s worth of salary saved. Another 5 years at age 35 it goes up by an additional multiple of your salary so now you need 2 year’s worth of salary. That means if your salary is $30,000 at age 25, you should be saving $4,500 a year (maintaining that 15% with any salary increases) and by the time you’re 30, you should have that 1 year’s worth of your current salary assuming it was invested to earn a 5-6% annual return.
In all reality, a return of 5-6% is very doable but if you are getting a late start, you need to consider a more aggressive investment approach to get back on track. In financial planning there are certain elements to your investment strategy and that is your willingness, ability, and need to take risk. Your willingness is your personal comfort level of risk when it comes to investing, your ability is what you are able to save based on your budget, and your need depends on your future needs (perhaps basing it off Fidelity’s benchmark). Larry Swedroe, the director of finance at Buckingham Asset Management, has several books where he addresses this concept of willingness, need, and ability to take risk. For a great introduction to investing, I would recommend his book, The Only Guide to a Winning Investment Strategy You’ll Ever Need: The Way Smart Money Invests Today.”
Since you know that you need approximately 10 times your income by the time you reach social security retirement age (67), this serves as a good target goal to work towards. If you plan on having an above average type of retirement, you may want to aim for 12 times your income. Like mentioned before, online calculators and rule-of-thumb benchmarks try to be a one-size fits all recommendation. With all the what-if scenarios and risk levels in your portfolio, anything can happen! It never hurts to visit an advisor to get an objective recommendation on the risk in your portfolio and retirement income needs going forward.
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