Saturday, December 15, 2012

How Much Should You Have in Retirement Savings? - average incomes

This post uses the "4% withdrawal" approach to retirement savings to estimate how much most people should have in savings -- by age.  And, given how much you actually have, what percent you should save going forward.

This post is designed for those earning approximately $40,000/year who are eligible for Social Security. Earn more? See higher income, or not eligible for Social Security.

Retirement Savings Targets for Those Eligible for Social Security

How much need in savings age 35, 40, 50, 60. 5-30 years before retirement
Retirement Savings Targets, by age

Have I saved enough for my retirement? Am I on track? Here's an easy-to-use graph to help those with earnings around $40,000/year plan for retirement. An earlier post calculated the percent of your salary you should save each year, depending upon when you start your retirement savings plan. This one provides some benchmarks to monitor your progress along the way.

How Much Will You Need to Retire? The Average Person With Social Security Will Need At Least 7 Times Salary

As you can see from the chart above (click to expand), no matter when you start saving, by the time you're 65 you'll need about 7 times your "then-current" salary in retirement savings. That is, assuming you want to maintain approximately the same standard of living in retirement that you could afford during your working years. Then-current just means it's times your salary at that time, not your current year's salary. 

If you were not eligible for Social Security, using the 4% withdrawal approach, you'd need ~19 times your salary in order to receive 75% of your pre-retirement income. If you earned $100k, you'd need about 12x your salary.  However, at these salary levels, given current Social Security guidelines, your Social Security benefit reduces your need to "only" 7 times your salary. (Note: For more on the 4% withdrawal approach, see Assumptions below.)

The Glide Paths: How Much Should I Have Saved by Age 35, 40, 50 & 60? -- 5-30 Years Before Retirement

The blue line shows the idealized retirement portfolio growth for a person who started saving for retirement at age 30. We already know that this person should be saving about 8%/year based upon the results from What Percent Should You Save for Retirement?

As you can see from the graph, if you start saving at age 30, the targets are:
  • a little over half a year's (then-current) salary by age 35
  • a little over 1x (times) salary by age 40 
  • about 3x salary by age 50, and
  • about 5.5x then-current salary by age 60.

Regardless of When you Start, You'll Want 4.5-5.5x Salary by Age 60

If instead of starting to save at age 30 you start at age 35 (the red line), the target at age 40 is three quarters of a year's salary instead of more than a bit more than a year's salary (of course, if you start at 35 you'll have to contribute more each year). However, over time, the lines converge. Regardless of when you start saving, you'll need about 7 times salary at age 65; and, you'll need about 4.5-5.5 times salary at age 60.

If You Already Have Savings, Hop on a Glide Path at Any Time

The previous series assumed you were starting from scratch.  However, you can hop on these "glide paths" at any time. For example, suppose you are 40 years old, have been saving only sporadically, but have just received a nice chunk of extra cash. As a result, you now have over a year's salary in savings.

To see where you stand, find your age on the horizontal axis and then check to see where your savings put you relative to the benchmarks. A year plus in salary puts you right on the blue, "starting at age 30," glide path, and you'll want to save about 8%/year from this point forward.

If, at age 40, you have three quarters of your salary in retirement savings, you're on the red, "starting at 35," glide path and will need to save about 11%/year. If your assets are between three quarters and one times your salary, your annual contribution should be between 8% and 11%.  (See below for a more precise estimate.)

Starting Your Savings After Age 40

The earlier posts generally assumed that you would start your savings by about age 40 at the latest -- primarily because if you did not, your required savings rate would be excessive. This chart suggests that, given current Social Security benefit levels, it's actually conceivable that you could start saving as late as age 50 and still meet these targets! Challenging? Yes.  But, feasible. (And, not recommended!)

The Real World May, No WILL, be Different!

Remember, these are benchmarks! In the real world, your retirement portfolio will not consistently deliver 5% real returns year after year. The "glide paths" in this chart show what would result if it did in order to give you a benchmark.

Some Key Assumptions (short version)

I've assumed that you:
  • Invest a constant percentage of your then-current salary each year until retirement
  • Earn a pre-retirement real (i.e., after-inflation) rate of return of 5% -- after taxes & expenses.
  • Retire at age 65, spending 75% of your current annual income (inflation-adjusted) in retirement
  • Start by withdrawing 5% (rather than the more normal 4%) of your assets your first year in retirement. 

The standard assumption these days is that you will withdraw 4%, not 5%; I assumed 4% in the "hi-income" version of this post. However, if Social Security is expected to cover over 50% of your yearly expenses in retirement, as in this case, you may be able to afford to be a little more aggressive. Ideally, I'd still try to target a 4% withdrawal rate.

For a more detailed discussion of the "4% withdrawal" approach and my assumptions, see Assumptions for the 4% Withdrawal Retirement Graphs.

For an estimate more tailored to your specific circumstances, and to get a better feel for the impact of some of the variables, I encourage you to enter your own data into My SIMPLE Retirement Savings Calculator.  Specifics of your situation, such as your pre-retirement investment returns and expected spending level in retirement, could make a significant difference. The graphs are best for getting a feel for the "big picture."

Related Posts

Other Easy-to-use graphs based on these same concepts:
My SIMPLE Retirement Savings Calculator an interactive calculator tailored to your specific circumstances
Start Retirement With a 4% Withdrawal Rate A discussion of the 4% withdrawal concept, from Time Magazine. For a more detailed discussion, see Wikipedia.
How Long Will You Live? A look at one of the most vexing issues in retirement planning.
Do You Need a Personal Strategic Plan?: a process for establishing life priorities
For lists of other popular posts and an index of stock market posts, by subject area, see the sidebar to the left or the blog header at the top of the page.
Copyright © 2012            Last modified: 12/1/2020

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  1. I will invest more in other things beyond a 401k to develop wealth independently of retirement. The more I save the sooner I can retire and live my life.

    1. Sounds like you're one of the "lucky" ones (I realize it's not really luck!). My gut says very many people will find it difficult to meet these targets. I'm planning to discuss things that can make it easier in a future post.

      Thanks for stopping by.


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