(MENAFN- ValueWalk) Most Americans feel they are behind in saving for retirement, and that may indeed be the case for many. However, to truly know where you stand, it helps to determine how much youʻll really need.
A recent survey found that the average American thinks they will need $1.3 million to retire , although another found that the majority of respondents targeted $1.8 million as their goal. These numbers may be inflated a bit due to fears about rising inflation, but inflation is back down closer to its normal range.
Nonetheless, these averages might still be in the ballpark for some, but the best way to zero in on how much you will need is to follow some pretty simple guidelines that don't involve spreadsheets or require an accounting degree.
A destination... with guideposts along the way There are many different rules and guidelines to establish retirement savings goals, but one of the best is championed by Fidelity Investments and other experts. This rule is simple, and it includes guideposts along the way so that you can continually track your status.
The rule says that you should have saved one times your salary at age 30, three times by age 40, six times by age 50, eight times by age 60, and roughly 10 times by the time you retire at around 65.
For example, if you are 50 years old and make $75,000 per year, you should have about $450,000 saved for retirement. When you reach age 65, assuming you retire that year and are making $90,000 per year, you should have about $900,000, which would typically be an adequate amount for a comfortable retirement.
This calculation is designed to give you a baseline amount, but actual needs will vary depending on the individual. Whether you will need more or less than this baseline number will be based on factors like your health, the health of loved ones, your mortgage status, where you live, your lifestyle, and whether or not you plan to work. If youʻre still paying off a big mortgage, plan to travel extensively, and have a higher cost of living, your number might be higher.
On the other hand, if you have paid off your mortgage, live in a less expensive part of the country, and plan to keep at least a part-time job in retirement, you probably wonʻt need as much.
This rule helps give you a sense of where you are and if you need to make changes and save and invest more. For example, if you are age 50 making $75,000 and only have $200,000 saved, you may want to consider contributing more to your retirement plan and cutting back or prioritizing expenses, if necessary. A conversation with a financial advisor would be a great place to start in determining a way forward.
The 4% rule While the Fidelity rule is forward-looking, there is another measure that estimates how much you will likely spend in retirement: the 4% rule . Quite simply, the rule says you should expect to spend roughly 4% of your total retirement savings each year of retirement.
Thus, if you have $900,000 saved for retirement at age 65, the 4% rule says you should expect to spend $36,000 that first year and about the same thereafter, taking into account inflation. William Bengen, the financial advisor who developed the rule in the 1990s, determined that this would allow retirement portfolios to last at least 30 years.
You also have to consider that you may not spend that much later in your retirement years, and you might work part time for some of it, offsetting the drain on your savings. In addition, you will also get Social Security income , further offsetting how much you take from retirement savings. Also keep in mind that your investments will continue to earn returns and grow while you are retired, likely faster than the rate of inflation.
The bottom line is if you haven't done a basic calculation of how much you might need in retirement, do it as soon as possible and then adjust your investment strategy accordingly.
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