Formulas can be confusing, calculators can be scary — but the good news is you might be doing better than you think.
Note: This story is sponsored by USAA.
In mid 2017, I posted on Twitter a series of benchmarks aimed at helping people figure out whether or not they were on track for retirement. They read like this: By age 30, you should have 1x your income socked away for retirement. By 40, 3x. By 50, 6x. By 60, 8x. And by retirement 10x. These guidelines were developed by Fidelity, but other similar sets exist — in other words, they’re not unusual. What was unusual was Twitter’s viral reaction. The Washington Post wrote about it. Many people judging by their often funny comments clearly thought these were ridiculous and unachievable. Others though liked the guidelines. Why? Because these marks set a level for a question that seems so very hard to answer: Am I saving enough for retirement?
That’s one of the four big questions USAA is tackling with its #LifeUninterrupted program. Over the next month we’ll be tackling all of them including figuring out how long your savings will last, whether you’ll be able to maintain your lifestyle, and figuring out ways to protect your savings. You can find out more about this initiative here.
The answer is, it depends. The EBRI Retirement Security Projection Model shows that 40% of people age 35 to 64 risk not having enough to meet their retirement expenses. Similarly, the National Retirement Risk Index, produced by the Center for Retirement Research at Boston College shows 50% of the population won’t have enough to maintain their current lifestyle in retirement. And yet, “retirement can be a lot cheaper than your working regular life,” says Annamaria Lusardi, Professor of Economics and Accountancy at The George Washington University School of Business. “You may no longer have to provide for your children, you might not need two cars for the household anymore if both of you aren’t working and you can even cut cost by moving into a smaller home.”
The point is: One size does not fit all. Here are some guidelines for figuring out whether you as an individual are saving enough.
It’s not retirement, it’s your retirement.
What does your retirement look like? If you haven’t asked that question — with your spouse or partner if you have one, it’s time. Only once you envision it can you begin to price it out. Because that’s when you’ll answer the questions about things like where you’ll live (in your big family home or a smaller one that will allow you to sock some of that prior home equity into savings), whether you’ll work (as many retirees are), if you’ll move (and lower your taxes as a result). The question of when you’ll retire is similarly important. The longer you continue to work, the more time your retirement savings have to grow and the fewer number of years you’ll have to rely on that stash to fund your lifestyle. Once you’ve got the answer to these questions sit down with pen (or maybe pencil) and paper and start adding up the amount you’ll need to live. If you’re struggling, a sit-down with a financial advisor can help.
Focus on income replacement.
Once you’ve got a sense of the numbers, you can start working on how to get there. Start with Social Security. How much of your monthly nut will that cover. (If you don’t know what you’re expecting from Social Security you can get your estimate at SocialSecurity.gov.) Many people start taking their benefits at age 62, but waiting means more money every month; for every year you delay taking benefits from 62 until 70 you’ll receive an increase of about 8%. That’s a huge help. Subtract that from the amount you estimate you’ll need to live each month. Then consider whether you’ll be receiving any pension income. Although most people in the US no longer have pensions, many military families do. Subtract your pension income from your monthly needs as well. What remains is the amount you’ll want to cover with retirement savings. “Based on the 4% safe withdrawal rule, a million dollar portfolio creates $40,000 of annual income,” says David Littell, professor of retirement income at The American College of Financial Services. You may need more. But you may also need less.
Concentrate on savings rate rather than the big numbers.
If you’re seeing that you haven’t saved enough, it can be — as my Twitter experience shows — demoralizing. Rather than focusing on that big goal number, focus on your savings rate and edging it up, Littell says. Typically, saving about 15% of your income, including any matching dollars from your employer over the course of a career will be enough. But if you haven’t started or you’re far below that, don’t try to bump up your savings all at once. Instead, increase your savings rate by 2%. Save at that rate for 6 months, then bump up your rate by another 2% and continue on this path until you get where you need to be. And make sure that you’re moving money into your retirement account automatically with each paycheck. If you don’t have a work-based retirement plan that does this for you, you can set up automatic transfers into an IRA on your own. “It’s okay to move at your pace,” Lusardi says. “You just need to be moving.”
Don’t let a slow start turn into no starter.
Finally, just because you haven’t started saving, don’t let it paralyze you and keep you from starting, Lusardi cautions. “When you make small modest successes throughout your saving journey you’ll feel better about your situation which will encourage you to continue to contribute.”
With reporting by Simone Johnson
Learn more at USAA.com, and consider getting a no-charge retirement review today by calling 1-800-531-3392.