How Much Should I Have Saved Today For Retirement?

It can be hard to gauge your financial readiness for retirement. Explore the benchmarks Fidelity recently released, and my recommended tweaks.

Fidelity Investments recently released recommended benchmarks for retirement savings based on age. They determined that workers should have saved an amount based on their salary by the following ages:

Age 35: 1 times salary
Age 45: 3 times salary
Age 55: 5 times salary
Retirement: 8 times salary

These benchmarks are perfectly fine as starting points to gauge your readiness for retirement. I like that it allows younger workers to see what they need to have socked away for retirement, as it can be hard to know how much to save for something that isn’t going to happen for 30+ years. There are some major downsides to these benchmarks that I want you to consider however when determining where you are currently at.

Social Security: The benchmarks were based on workers receiving 85% of their promised Social Security benefits. I think there are a lot of changes that will be made to Social Security by the time a 35 or 45 year old worker retires, and they could have a dramatic effect on retirement income. One likely change is that Social Security becomes means tested, which means those that need it most will get a higher monthly payment. This also means that the more money you have in savings, the less you will receive. I would contend that if you have 8 times your salary in savings, you will be considered capable of funding your own retirement. Another possible change is that the age to start taking Social Security will likely continue to rise. These changes could mean 85% may be too high of an assumption, especially for younger workers.

Withdrawal Rates: How much annual income do you believe your portfolio will provide? If you have $500,000 in an IRA, how much can you take out each year and be reasonably sure your portfolio will last your lifetime? Research shows 4% is a good rule of thumb. This means $500,000 should only provide about $20,000 per year! I bet you were thinking it would be worth a lot more. If you take 5%-6%, you risk running out of money well before death. Taking more than that means you will probably be out of money in just a few years.

Retirement Income: If you are able to continue working after retirement age, it will lower how much you need in your portfolio for retirement. Thinking about the 4% rule of thumb mentioned above, if you can earn $500 per month in retirement, which would represent having saved $150,000. Granted it may be difficult to earn $500 per month until the day you die, but it still shows that retirement income can significantly lower the amount you need in retirement savings. This is why I encourage clients to have a career they love, and are willing to keep doing (even if just part-time) well past normal retirement age.

Traditional Retirement May Be Dead: I don’t make predictions very often, but I will say I believe the typical notion of retirement is dead. Working until age 65 and then no longer working simply isn’t going to be the normal case anymore. For one, most Americans haven’t saved enough to support this traditional view of retirement. Second, as we continue to make medical advances that extend our lives, we will have to find ways to be productive at an older age. Social programs such as Social Security and Medicare weren’t designed to support Americans living as long as they probably will.

Lifestyle: Your lifestyle in retirement is the important determinant of how much money you will need to save. Some of my clients travel the world or take their family on annual cruises, and this means they spend a lot more in retirement than they did before retiring. Other clients focus their time and energy on charitable work, and spend significantly less than they did before retirement. To the above point, if you continue to earn money in retirement, this will shift your savings need. Your personal goals for what you want to do in retirement will determine how much you need to save.

Fidelity’s benchmarks are a great starting point. I believe they are too low for most of my clients, however we must recognize that most American’s are not on track to meet these savings goals, much less exceed them. My recommendation is be sure you are putting away at least 10%-15% of your salary for long-term goals (such as retirement), and work really hard to determine what you want life to look like after age 65. Only after you determine your goals can you be sure you are on the right path to achieving them.

So what do you think? Are you on track to meet or exceed these benchmarks? If not, are you willing to do what it takes to get on track? Share your thoughts in the comments section.

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Beth Mathison September 20, 2012 at 01:49 PM
Great article -- thanks! From someone who has been saving for retirement since right out of college, the tested Social Security proposals make me sigh. I've sacrificed when I was young, and will most likely miss out on SS benefits because of it.
H.E. Pennypacker September 20, 2012 at 02:09 PM
With hyperinflation coming soon, you might as well start buying commodities, because if Obummer wins, his spending is going to make Kenya look like a good place to live.
Johnny Blade September 20, 2012 at 05:51 PM
Well I agree about the money printing, but it does NOT matter which Mob famliy head wins they all take orders from the Banksters anyhow .. Helicopter Ben would keep printing even if Romeny wins .. Who bailed out the Banksters the first time, Bush with TARP .. so it is time to wake up people it is us against the BANKSTERS ... What did Jefferson say, bankers are worse than standing armies, pretty soon they will print enough money to buy your house and we will all be renting from the Banksters
Scott Berg September 21, 2012 at 01:58 PM
You provided some useful guidelines for "how much is enough?" The trick is how to get there. Many investment advisors work on a commission based on the portfolio size or the number and size of the transactions they recommend. That sets up an inherent conflict of interest between an investor trying to maximize returns and an advisor trying to maximize his income. The commonly used 1-2% off the top of the total balance is effectively reducing the total returns, meaning you need to beat the maket by a couple of points just to break even with a broad market index. That's why some places set minimum account sizes of hundreds of throusands of dollars - the same work for them guarantees a bigger fee, so they set the minimum to cover the overhead plaus income they want. How does an investor manage that overhead?
Alan Moore, MS, CFP® September 21, 2012 at 04:59 PM
Scott, excellent points. There is a direct correlation between advisor and fund fees with investment returns. All things equal, lower fees means high returns for the client. Those who sell investment products on a commission basis make money (typically) when clients buy and sell investments, so there is a conflict on interest here as you noted. There are a couple of ways to manage this "overhead" you mention. One is to interview several investment advisors to see what is best for you. I am bias towards fee-only advisors (because I am one) but many have high account minimums so it may not always be an option. I have a lot of folks contacting me because I don't have high minimums. Another way is through proper rebalancing. Research has suggested that be rebalancing when your portfolio gets out of balance can increase returns by as much as 1% a year. This is because you are selling high and buying low. The final way is to be sure your mutual funds have low expenses. I have seen portfolios with 2% fees on top of the advisors fees, which just means you get 2% less return. Our fees average .35%, and can be even lower. I believe the investment advisor deserves to get paid for their work, but you are correct that this can limit your returns. Just remember, investors generally significantly under perform the market due to behaviors, not fees.


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