As financial planners, the number one question we get from clients is this: “How much money do I need to save before I can retire?”
While studies show that the average rate of savings for retirement differs slightly, the consensus across them all is that the rate is too low.
Think about the percentage of income you save for retirement. Is saving for retirement just picking a number out of thin air, or do you put serious thought into it? Is it all you think you can afford? Your savings rate must be part of a much larger retirement plan.
How Much Money You Need to Save for Retirement
Like many questions in financial planning the answer is: It depends. How much you need will depend on how much your retirement costs. It will depend on the amount of risk you take with your investments and the growth that results. It will depend on how much money you save and invest for retirement. It will depend on your strategy around income sources like social security. And it will depend on how these things change over time.
5 Key Points to Help You Decide How Much is Right for YOU
- Think about what you want your retirement to look like
- Women may need to take more investment risk
- Pay yourself first
- Consider delaying social security
- Check in on your progress annually
So let’s start with the big picture.
What Do You Want Your Retirement to Look Like?
Break this down into financial and non-financial aspects of retirement. Financial would be how much you want to have monthly to spend; how much your goals like travel, or a vacation home will cost you; a strategy around any debt. Non-financial aspects are how you envision spending your time, your values, perhaps a new career.
Once you’ve identified these aspects, there are rules of thumb to calculate how much money you need. One rule is to save a certain amount every year based on your salary. For example, aim to have saved one times your salary by age 30, 2x by 35, 4x by age 45. This link to an article from Fidelity outlines savings rates by age and salary.
Women Tend Not to Take as Much Investment Risk as Men
This means that their investments don’t grow as much, which impacts how much there is to spend in retirement. Women need this growth, especially since women on average have 40% less saved for retirement than men.
How does risk truly affect our returns? More risk generally means more growth. For example, if you saved $10,000/year for 20 years and took little risk and your investments grew by 3%, you would have $268,704.
However, if you saved that same $10,000/year for 20 years but took more risk and earned 6%/year, you would have $367,856, That is nearly $100,000 more over the same period of time. You have saved the same amount of money, but the growth varied radically depending on the amount of risk taken.
One Smart Rule of Thumb is to Pay Yourself First
By this we mean contribute to your retirement and then fund your other expenses. There are many different retirement plan options and contributing the maximum should be a goal. If you are under 50 the current maximum contribution to your 401k is $19,500.
If you are over 50 there is an additional catch up contribution of $6,500 allowed for a total of $26,000. Aim to contribute at least enough to capture a full employer match. Business owners have different options, one of which is the Solo 401k.
This allows contributions as both employer and employee, which can allow for up to $57,000/year depending on annual income. Whatever plan you have access to, aim to pay yourself first to get that money working for your future.
Have a Plan Around Social Security
Hard to believe a benefit most Americans are entitled to can be as complex as social security. To qualify for social security you need to have 40 credits, which is 10 working years. Your benefit will be based on the 35 highest earner years, and when you choose to take the benefit.
Deferring to age 70 will allow your benefit to increase by 8%/year after you are entitled to your full retirement benefit. Taking social security early will reduce your benefit for life up to as much as 30% less than you full retirement benefit.
Best practice here is not to claim your benefit before your full retirement age. If you are unsure of when this is you can find it on your statement at ssa.gov. There are other best practices depending on whether you are single, divorced, married, the higher or the lower earner in a couple.
Check In Annually on Where You Are
Life changes, pandemics happen, markets go up and down, and you may need to readjust along the way. Stay engaged so you know if steps need to be taken to get back on course, or if you are right on track. And if you are not sure where you are or want a partner in the journey, reach out to a professional for guidance.
