Once you get serious about saving and investing, you’re bound to ask the question, “How much do I really need to retire?” The answer, like everything in finance, depends on your unique circumstances.
One rule of thumb says that you need to save 25 times your annual expenses, not your income, in order to prepare for a comfortable retirement. This assumes that you will withdraw 4 percent of your investments per year and that your stocks will have an annual average return of 7 percent. This 7 percent figure is historically accurate and adjusted for rates of inflation.
The 4 percent is the magic percentage of withdrawal that gives the money in your portfolio a strong chance of lasting for 30 years. Reducing your annual withdrawal to 3 percent makes the chances of success rise to almost completely foolproof.
Your own personal retirement savings and investments will be combines with your Social Security benefits, so it’s important to nurture both.
How much is enough?
It’s absolutely normal to wonder how your retirement savings and investing compares to your friends and coworkers. It’s human nature to be curious, especially about something with such a mystique surrounding it. Unfortunately, most people you talk to won’t know if they’re on the right track either, so it’s best to set a goal for yourself and work toward that instead of comparing yourself to others who may not be on the same path as you.
One thing is for sure: The earlier you start, the easier it will be. By reinvesting any dividends your money earns in the market (historically the 7 to 10 percent annually, on average), your money grows and grows. The return you’ve earned on your money starts earning returns itself and then those new returns also start earning returns and it goes on and on. Welcome to the world of your money making money for you.
This calculator shows the magic of regular returns. A person who invests $250 per month for 30 years will have more than $283,000. A person who invests that same amount for half the time will have just $75,000. That’s the magic of compounding.
How much you should have saved for retirement by age
In your 20s you should begin by establishing strong habits. Investing at this age can be tricky. You likely don’t have a ton of obligations, but you also ahead of your peak earning years. You may also have student loans and credit card debt to pay back. It’s totally possible to invest while you’re paying down debt, just be sure to be smart about it. If you haven’t yet, refinance your loans to get the interest rate down. Hustle to get your credit card debt paid down. If you’re lucky enough to have an employer-sponsored 401k with matching, contribute at least enough to get the match. Aim to stash 10 percent of your income each year in a combination of savings, 401k investments, IRAs and stock purchases.
In your 30s you should really be hitting a stride. Hopefully, your debt is paid off (or at least manageable) and you are making more money than you were in your 20s. You might now be part of a two-income household that relieves some financial pressures. Every time you get a raise, up your 401k contribution. The goal is to have two times your annual salary put aside for retirement in a combination of savings, 401k investments, IRAs and stock purchases.
In your 40s you should get serious. If you haven’t started saving and investing for retirement yet, you have got to buckle down and catch up. This might mean making some tough decisions. If you have college savings in place for your children, but no retirement money for you, you may need to make some adjustments. Realistically, they have a lot more time to pay off student loans than you have to save for retirement. Think about bringing in some additional income to kick-start your retirement savings and investments. The goal is to have four times your annual salary put aside for retirement in a combination of savings, 401k investments, IRAs and stock purchases.
In your 50s you should think about Future You. When you picture retirement, what do you see? Will you work? Travel? Move into a smaller home? Take a critical look at the health of you and your partner. It’s not too late to address issues, but too late might be right around the corner. Evaluate your insurance. Do you have enough and the right kinds? If you’re 50 or older, you can bump up your 401k contributions to $25,500 and your IRA contributions to $7,000. Start doing that because you’re in the final stretch. The goal is to have seven times your annual salary put aside for retirement in a combination of real estate assets, savings, 401k investments, IRAs and stock purchases.
In your 60s you should get ready to relax, or not. If you’ve waited until now to begin saving and investing for retirement, get comfortable with the reality of working a bit longer. You should also decide when to start collecting Social Security. The longer you wait, the more money you will get each month. The AARP calculator can help you decide when to claim. Start compiling a retirement budget. At this point, you should have around 10 times your final annual salary in a combination of real estate assets, savings, 401k investments, IRAs and stock purchases.
At retirement age, you should get back to budgeting basics. Take a good look at the benefits you’ve accrued and the wealth you’ve grown. This is what you’ll be living off of now, so make the most of it.
A little more about Social Security
In the United States, we can (mostly) count on our Social Security benefits to act as a safety net for us in our old age. The original Social Security Act was signed into law by President Franklin D. Roosevelt in 1935. Income derived from Social Security is currently estimated to have reduced the poverty rate for Americans age 65 or older from about 40 percent to below 10 percent.
In 2018, the trustees of the Social Security Trust Fund reported that the program will become financially insolvent in the year 2034 unless corrective action is enacted by Congress. While it’s yet to be determined if those benefits will be around in the coming decades, it’s best to act as if and plan accordingly. That being said, even if the program remains solvent and is around beyond 2034, it’s difficult to project how much those individual benefits will be per month. Some of it is out of our hands and depends on what changes the government makes to the program. Some of it is completely under our control.
Social Security benefits are based on your earnings during your working years. Here are some things you can do to ensure you get the largest amount of monthly benefits available to you.
Check your earnings record every year against your own tax returns to verify that the information is correct on the Social Security website. Your annual income determines your Social Security benefits and if there are errors made, your earnings might not be reported accurately, or worse, might not be reported at all.
Your Social Security benefit is based on your average monthly earnings over your 35 highest-earning years with adjustments for inflation. It’s important to work as many years as possible so that you don’t have zero income years bringing down your average.
Try to get as much “on the books” earning as you can because only income you pay Social Security taxes on increases your Social Security benefits. The money you earn from a side hustle doesn’t have Social Security taxes taken out of it and doesn’t count toward your benefit-determining income.
The bottom line
While data shows that younger people are saving and investing more than past generations, there is still a large population of people who will rely solely on Social Security benefits—which may not be there—as income during their golden years. Start early, invest often, do everything in your power to control your future finances.