06 Jun Forbes: How Much Do You Really Need To Save For A Comfortable Retirement?
By: Tom Anderson, CONTRIBUTOR to Forbes
Saving for retirement is stressful especially if you’re just a few years into your career.
For millennials in particular, it can seem like there are far more pressing financial goals to contend with — paying off student debt, buying a home, and starting a family.
Unlike other financial goals, you may not have a good sense of how much you’ll really need to save for retirement. But financial experts say it’s still worth it to estimate how much you should save now so you can reach your retirement goals later. Here are three tips to figure out how much you really need to save for a comfortable retirement:
Benchmark your savings
Plenty of benchmarks exist for retirement savings.
Traditionally, financial advisors have recommended people save at least $1 million to retire in comfort. Fidelity Investments, a large provider of retirement investment accounts, suggests workers aim to save at least eight times their ending salary by retirement.
But many Americans fall short of those lofty numbers. The average retirement savings is about $104,000 for U.S. households with members ages 55 to 64 and $148,000 for households with members 65 to 74 years old, according to an analysis by the Government Accountability Office.
Financial advisors often estimate how much you will need in retirement by calculating how much income your investment portfolio can replace each year in retirement. That calculation is called the replacement rate. Advisors typically recommend having a portfolio that has a replacement rate of 80%, meaning the income from the portfolio replaces 80% of your total compensation each year. For example, if you earned $100,000 the year before you retired, many financial advisors would recommend that you’d need a portfolio that generates $80,000 in income annual plus enough to keep pace with inflation.
Morningstar Investment Management tested the 80% replacement rate rule and found that for most retirees it was a reasonable benchmark. However, when actual spending patterns of households were considered, the data showed that many people could get by with about 20% less in retirement savings.
“The true cost of retirement is highly personalized based on each household’s unique facts and circumstances,” researchers concluded.
Find your unique number
So there’s no one right answer to how much you should save for retirement. Income needs in retirement can vary wildly, depending on the lifestyle you want to lead and your health, says Evan Shorten, a certified financial planner and president of Paragon Financial Partners in Los Angeles.
If you envision traveling the world in style, you’ll need to save more money than someone who expects to be content just puttering around in their garden.
Use an online calculator to figure out how much you’ll need to save to make your retirement vision a retirement reality. Fidelity, online financial advisor Personal Capital and The Vanguard Group, the largest provider of retirement accounts in the U.S., offer great free retirement calculators.
Put a plan into action
Once you have an estimate, you can develop a financial plan. Keep in mind that the earlier you decide to retire, the more you will need to save, notes Sterling Neblett, founding partner of Centurion Wealth Management in McLean, Virginia. If your goal is to leave behind assets for your heirs — or simply to reduce the risk that you’ll become destitute by outliving your money — you’ll need to save more too.
With a rough idea of the savings needed for retirement, you can start choosing how you would like to save, says Greg Ostrowski, a certified financial planner for Scarborough Capital Management in Annapolis, Maryland.
Ostrowski recommends putting away at least 15% of your income, and gradually increasing this savings rate over time to 20%. If the idea of committing to that level of savings makes you queasy, Ostrowski suggests starting where you are comfortable and boosting your rate by 1 percentage point every few months.
You can start small, but make sure you start. If you have an employer match available for a 401(k) or similar retirement plan, save at least enough in that account to get the match. Financial Engines, an investment advisory firm, estimates that about a quarter of retirement plan participants are missing out on receiving the full company match. That translates into average loss of $1,336 per person each year or an estimated $24 billion of missed retirement savings in total.
In addition to saving all you can, reducing your expenses, particularly your debt load, can bring you closer to your retirement goals. Focus on paying down your student loans and other debts as aggressively as you can. Investigate options for refinancing where appropriate. For example, CommonBond, my employer, saves the average borrower more than $14,500 over the life of their loan through refinancing. These savings and others can add up significantly over time.
Having a specific savings goal and a solid financial plan can make preparing for retirement a source of strength, not a source of stress.