RETIREMENT SAVINGS BY AGE – ARE YOU ON COURSE?

Ever wondered how much you should have saved by a certain age for your retirement? Are your savings increasing at a comfortable rate? If these questions have crossed your mind you need to read this.

Figure Out How Much You Should Save By Age

If there is one piece of financial advice I would give my younger self would be to have saved more money earlier.

I know that I am not the only one. There are a lot of us who wish we could have saved more when we were younger.

For those who are able to put aside some money each month often wonder how much they need to have saved by their age to be comfortable after retirement. How much money should I have saved is a fairly common question people have.

In this blog post, I will be talking about some simple ways to find out how much money you need to have in your savings by different ages. This is across different tools including your 401(k) savings plan, Traditional and Roth IRAs, SEP IRAs or investment accounts.

Read More:
Why Do People Find It Difficult To Save + How You Can Start
How To Track Your Sinking Funds (plus Free Printable Tracker)
When To Stop Accumulating Debt?

Why You Should Save Money

Saving money is a vehicle that has many upsides and opens up opportunities.

To Fund Your Retirement

Whilst you may be bringing in a periodic paycheck now, this is not going to continue forever. You will retire one day. Your savings will let you maintain a comfortable lifestyle post-retirement.

For A Rainy Day

Life will throw curveballs your way. It could be broken bone or a layoff. These events are stressful and costly. Have a stash of money put aside for emergencies will ease you through the tough times.

Realizing Your Financial Goals

A house, a dream wedding, your child’s education – I bet you have financial goals and aspirations. Sinking funds are a great way to save for large expenses.

Taking Advantage of Opportunities

Want to start a business? Or help others in need? Your savings are going to help you take advantage of opportunities that come by your way.

How Much Are People Saving?

Having said this, how much do people actually save in America?

Not as much as they were earlier.

US Personal Savings Rate

In the United States, Personal Savings Rate is the ratio of personal income saved to personal net disposable income during a certain period of time.

As is obvious, the black line shows that the Personal Saving Rate has been declining steadily.

The low-interest environment does not encourage people to save. People prefer to either spend too much, or they are just not earning enough.

Or, perhaps, people just don’t have the foresight to save for their future.

I Just Can’t Save Enough!

I agree life has challenges. Is this your story when you think about how much you should have saved by age?

20s – ” I have just started earning. This is the time to have fun, go out with my friends. I have earned the right to spend my money. Also, I have loads to time to save before I retire. 65 is so far away.” (Me: Is it really?)

30s – ” I am serious about this person and will get married soon. That costs a whole lot of money. I have car payments, need to furnish a house. Even though I want to, I can’t afford to think of retirement right now. Don’t worry, I will start soon.” (Me: That is what they all say.)

40s – “Oh man, I have been working for almost two decades and have nothing in my savings to show for it. I am beginning to get worried. But what can I do? How do you expect me to save? We are now a family of four. Seen how expensive children are? I will start next year.” (Me: High time)

50 – “My kids are going to ready to go to college. Seen how much they cost? All my savings are going towards that. And my car needs to be replaced. Plus our house needs urgent repairs. I know I am late and I am worried about my retirement. How much do we need to save?” (Me: Ummm…)

Age 60 – “Where did time go? How will I manage once I retire? Looks like I will never be able to retire.” (Me: Shakes head.)

This is the reality of many people. Will this be your story too?

If you can think you are the one who is being spoken of in this story, or if you have no financial plan outlined for your future, then it is time to

WAKE UP.

RETHINK what you are doing.

BE PURPOSEFUL with your life and your goals.

START SAVING and accumulating wealth.

The best time to begin saving was yesterday. The second best time in NOW. Just START.

Ideal Savings By Age 20, 30, 40 and so on?

So, you want to know if your savings are on track to lead a comfortable life post retirement. How do you decide? There are many ways to figure this out.

1. Multiple of Salary

How much do you need to save for retirement? This is one of the most common questions people have. So, Fidelity did an analysis to come up with an age-based plan to help you stay on track for your retirement.

This plan will help you save 10x (times) your pre-retirement income by the time you retire at age 67. A 10x goal is considered adequate to support your lifestyle.

In order to reach that goal, you have to start now.

Assuming you are 30 years old and earning $50,000, then your accumulated savings should be $50,000.

If your salary increases to $65,000 by the time you are 40, then you should aim to have saved $195,000 by the time you are blowing candles on your fortieth birthday cake.

This plan by Fidelity presumes that half of your savings will be invested in stocks.

Image Courtesy: Fidelity, How Much Do I Need To Retire

If you haven’t saved anything? In case you are just starting, then you need to play catch up. Bump up your savings till the time you catch up.

Remember, this is a rule-of-thumb that will give you an estimate. Factors like when you plan to retire, how you plan to live in retirement, other sources of income will affect the amount you need to save.

2. The Multiply By 25 Rule

The “Multiply by 25 Rule” estimates how much money you will need in retirement by multiplying your desired income by 25.

For example, if you need $40,000 annually for your post-retirement expenses, then you will need a portfolio of $1,000,000 for your retirement.

The “Multiply by 25 Rule” multiplies your annual expenses by 25 to calculate how much you will need to save up for your retirement corpus.

In other words, this means that you can safely withdraw 4% of your pot each year and live comfortably on the corpus for 25 years after you retire.

But what about inflation and the rise in the cost of living?

To explain, your standard of living will improve between now and the time you retire. This will lead to higher expenses. Your annual household budget will be more.

Inflation will also affect your numbers, especially if you are several decades away from retirement. To know how much your current expenses will be after factoring in inflation, use this rule of thumb:

If you are

  • 10 years away from retirement, multiply your expenses by 1.48.
  • 20 years away from retirement, multiply by 2.19
  • 25 years away from retirement, multiply by 2.67

So, if you currently spend $40,000 annually are going to retire 10 years later, chances are that you will want to withdraw $59,200 ($40,000 x 1.48) annually from your corpus.

Limitations of this rule

The Multiply by 25 Rule is a very simplistic guideline to give you a rough estimate. It is best to use it as that – a ‘guideline’ and not a ‘rule’.

in addition, this guideline does not take into account factors like

  • Taxes – if you withdraw money from your IRA you will have to pay federal and state taxes. So $40,000 withdrawal may mean you end up with only about $30,000 in your hands.
  • Fee – on the other hand, if you are withdrawing from mutual funds, there are likely to be fees to be paid. These fees will reduce the amount that you actually get in your hand and can spend.
  • Longevity – the guideline works well for those who will live between 25-30 years post-retirement. According to the United States Government statistics, the nation’s 90 and older population has increased rapidly over the past few years and will continue to do so. More people are now living well into their 90s. So a corpus of 25 times may not be sufficient for them.

In summary, use this as a guideline to give you an initial estimate. However, keep in mind your specific circumstance and other factors to come up with a number for you. Consult with a financial adviser to help you plan your retirement.

Let’s Summarize: How Much Should You Save?

To summarize:

Saving money can be tough but it is important. Your saving will help you tide over rough times or enable you to take advantage of opportunities. You need savings to fund your retirement.

Most importantly, you need to have a well-defined plan for your savings to achieve financial goals.

Next, remember there are a couple of different approaches to figuring out how much you should save by different ages to fund your retirement. These guidelines can give you a good starting point.

Ultimately, the point is that the earlier you start saving, the better off you are.

If you think you are late, you should ramp up to reach the desired levels.

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