Sunday, December 9, 2012

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

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

Those With Higher-Salaries Need to Save More Than The Average

Have I saved enough for my retirement? Am I on track? Here's an easy-to-use graph to help those earning $100,000 or more plan for retirement; they need to save more than the average. An earlier post calculated the percent of salary that high-income earners should save each year, depending upon when they start their retirement savings plan. This one provides some benchmarks to monitor your progress along the way.

Retirement Savings Targets for Those With Higher Salaries

How much should I have in retirement savings at age 30, 35, 40, 45, 50, 55, 60 ...
Retirement Savings Targets for Higher Salaries

This post is designed for those earning $100k or more who are eligible for Social Security. Earn more? See targets for those not eligible for Social Security. Earn less? See typical Social Security recipients. Ending targets for all salary levels are covered in How Much Will You Need to Retire?

High-income Earners With Social Security Will Need 12-13 Times Salary to Retire Comfortably at Age 65

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 12-13 times your "then-current" salary in retirement savings. That is, assuming you want to maintain 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, and wanted 100% of your salary, the 4% guideline would recommend that you accumulate (100%/4%=) 25 times your salary; if you wanted 75% of your salary, you'd need (75%/4%=) ~19 times your salary. Your Social Security benefit reduces that to "only" 12.5 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 13.5%/year based upon the results from What Percent Should High-Income Earners Save for Retirement?

As you can see from the graph, if you start saving at age 30, the targets are:
  • about 1x (times) then-current salary by age 35
  • 2x salary by age 40 
  • 5x salary by age 50, and
  • about 9.5x then-current salary by age 60.

Regardless of When you Start, You'll Want About 8.5-9.5x 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 1.25x salary instead of 2x 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 12.5 times salary at age 65; and, you'll need 8.5-9.5 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 35 years old, have been saving only sporadically, but have just received a nice chunk of extra cash. As a result, you now have 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. One year's salary puts you right on the blue, "starting at age 30," glide path, and you'll want to save about 13.5%/year from this point forward.

If, at age 35, you have 1.5x your salary in retirement savings, you're on the green, "starting at 25," glide path and will only need to save about 10%/year. If your assets are between one and 1.5 times your salary, your annual contribution should be between 10% and 13.5%.  (See below for a more precise estimate.)

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.

What If I Earn More, or Less, Than $100,000?

If you earn between $40,000 and $100,000, your targets will be between these numbers and those in the average salaries post.  Earn more and your targets will be between these numbers and the targets for those without Social Security.

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, receiving 75% of your current annual income (inflation-adjusted) in retirement
  • Follow the "4% Withdrawal" guidelines, starting by withdrawing 4% of your assets your first year in retirement.
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 better 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 posts, by subject area, see the sidebar to the left or the blog header at the top of the page.
Copyright © 2012                         Last modified: 12/2/2020

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