One of the most common questions we get as retirement planners and financial advisors is, “How much should I have set aside for retirement?”
This is a very subjective question. A lot depends on how much income you want to be able to spend in retirement and how much your expenses will be. It also depends a lot on your goals.
There are a few different benchmarks that you can look at to determine if you’re on track.
In most cases, we measure this based on the amount of your salary now and how much you have saved in relation to that salary. We found that most people typically spend 75-100% of what they were making while they were earning. So, if you make $100,000 a year, it’s likely that in retirement you’re going to want to spend $75,000-$100,000 a year. Again, very individualized, it depends on your goals, and working with a financial planner can help you determine that.
There are a few different ages that you can look at.
Typically, by the age of 30, you want to have about half of your salary saved.
By the age of 40, you want to have close to two times your salary saved.
By the age of 50, you want to be closer to five or six times your salary.
By the age of 60, you probably want to target around ten times your salary, and by 65, you want to have 12-13 times your salary, in order to have enough to cover you.
If you’re looking at dollar amounts saved over the working career, that’s a helpful tool to look at, but it’s most beneficial to work on this with a financial plan so that we can tailor it exactly to the income that you're targeting.
Another rule-of-thumb that you can utilize is that, typically, you can spend about 4 or 5 % of the value of your assets in retirement without tapping into the principal. We typically use 4% as a conservative number. So, as a rule-of-thumb, if you have a million dollars saved going into your retirement, you can generate about $40,000 a year of income on that for the rest of your life. Five percent is a little more aggressive figure, depending on returns and the way that you invest. Let’s say your target is $120,000 a year that you want to be able to spend in retirement. You're probably going to want to have about three million dollars saved in order to cover that.
There are a lot of other factors that are very personalized - whether you have a pension or you want to rely a little bit on Social Security.
So there are some other factors that we build into our financial planning, but as a general rule-of-thumb, you want to take whatever the income you want in retirement, divide that by 4% and that will give you the dollar amount that you want to have saved by that point.
Please reach out to one of our advisors if there’s anything we can do to help you plan for your retirement.