Are You Saving Enough for Retirement?

Are you saving enough for retirement? Money magazine have a rough guide to help you find out if you are or not. Here are the details:

• If you're 45 years old, multiply your current income by 4.1 and this is the amount you should have saved for retirement to be on track.

• If you're 50 years old, multiply your current income by 6.1 and this is the amount you should have saved for retirement to be on track.

• If you're 55 years old, multiply your current income by 8.5 and this is the amount you should have saved for retirement to be on track.

• If you're 60 years old, multiply your current income by 11.4 and this is the amount you should have saved for retirement to be on track.

Here are their assumptions:

• 80% of pre-retirement income replacement
• Includes full Social Security
• No pension
• 4% annual real return
• 4% inflation-adjusted, distribution rate
• 30 years in retirement

Personally, I used a different set of assumptions when I set my retirement number but these are in the ballpark. Most notably, I assumed that I'd get nothing from Social Security and I set my own expected income number (versus simply assuming a percentage of my current income.)

But if I use their formula, I'm right on target assuming I need 80% of my current income to survive. But I don't need 80% -- I need 50% (or less). Given this measure, I'm way ahead.

How about you? Do these numbers make you feel more secure in your savings or make you realize that you need to do more?

Comments

[Kirk]

Are you already spending only 50% or less of your income? Just wondering how you came to the 50% pre-retirement number.

One area that I think these rules of thumb underestimate is the medical costs a retiree faces. I recently read (can't remember exact source) that a retired couple needs approximately $250,000 dedicated at the start of retirement for medical costs. This often increases a couple's retirement savings needs by 10% or more.

[FMF]

Kirk --

Yes, if you take out savings, giving, and taxes (all of which will likely be reduced or eliminated during retirement), we're spending below 50% of our income on living expenses. Well below, actually.

[Sheyenne]

Is there a formula for if you're younger? I'm only 30 years old.

[Paul]

Sheyenne,

I know there is a better way to do this, but I plotted the existing data points and interpolated for other ages. It looks like the number for age 30 would be about 3. This is a rough estimate, but it looks like it's in the ballpark.

[savvy]

These types of calculators are largely useless to me because they typically assume a retirement age of 65. I plan to retire no later than 50 so I will have 50 years (God willing) of retirement to fund.

By my own calculations, I believe I'm on track to meet that goal but I will probably consult with a financial planner next year to get a second opinion.

[sow]

I don't understand how they come up with these figures. When someone retires (if they retire), why would they only need 80% of pre-retirement income? On day one, do they start eating 20% less? Take 20% less showers? Shop 20% less? Use 20% less utilities?

And 30 years of retirement? What if the person lives longer? How do you ensure not "running out" of money? I agree with Kirk, people underestimate medical costs.

And I'm not sure taxes will be lower in the future. Taxes will change. And tax deductions that people had before retirement may be gone due to circumstances and financial decisions (no more kids and house paid off). And Social"ist" Security will soon crumble. Where do you think Uncle Sam will go once the systems falls apart. There is speculation that they'll get money from Qualified Retirement Plans...after all, they created them right?

I believe if we focus on getting rich today, then tomorrow it'll be a lot easier.

["Mo" Money]

Interesting article. This is a good way to find what you will need in your retirement. We all need to plan and starting with these numbers is helpful.

[savvy]

@ sow - I predict I will only need 80% of my pre-retirement income because I currently save a little over 20% for retirement. I will not have a mortgage payment when I enter retirement, so what I was paying to the mortgage will defray the increased cost of health insurance, utilities, etc. Of course no one can truly consider every variable but I think 80% is a good start.

[sow]

@ savvy - So, the question is, are we supposed to plan to be poor? It says to plan on living on 80% of your income and be in a lower tax bracket. Don't those two strategies and goals suggest that we will have less money in the future? I believe this is where people make the mistake...if their goal is to amass more wealth. Choose to be rich and don't plan on being poor.

[savvy]

@ sow - How is that planning to be poor? I also don't understand your assumption that people will have less money in the future. I lead a fairly comfortable lifestyle yet I live on less than I make. Living on less than you make is not inherently being poor.

So if I live on 80% of my income now, doing so in retirement is merely continuing to lead the same lifestyle only the funds come from my assets (retirement and other savings) vs a paycheck or other employment.

I may or may not be in a lower tax bracket simply because while I will have plenty of assets (investments) in retirement, there is no need for me to draw upon them at the same rate as I do now. There will be no mortgage to pay and no need to save for retirement if you're already retired so retirement account distributions don't need to equal current income.

in addition, tax brackets refer to how your income is taxed and has nothing to do with your net worth or amount of assets. If I have $2M sitting in a 401(k) and/or IRA, I don't pay any taxes on those funds until I access them. Now suppose I tap my taxable accounts and leave the retirement accounts alone. I will be subject to capital gains tax (currently 15% IIRC) which puts me in a lower tax bracket because I would have no earned income. That doesn't mean I'm poor.

The wealthy understand how to structure their finances to give them the maximum benefit while minimizing taxes as much as legally possible.

[Jake]

I always wonder how I should adjust these guidelines for an early retirement goal (say, age 50). If I just shift everything forward 15 years, that seems too conservative to me -- I will be saving more rapidly at any given age compared to someone who isn't targeting early retirement, and it's not reasonable to say that I'm not "on track" unless I have over 4x my annual income saved by age 30.

[rwh]

It's my understanding the 80% figure is derived from a working person having more work-related expenses than a retired person. This would include commuting costs, wardrobe, mortgage etc. A retired person probably would not need to buy a replacement car as often and a retired couple could probably function with fewer cars, or in a smaller home. Personally, we'll probably move to a smaller and less expensive home sometime between when our kids leave home and when we retire. So we aren't planning to live poorer, but we do expect to have fewer expenses.

I guess it could be prudent to assume no social security in your calculations if you want to be particularly conservative, but I think social security will continue to be there. Certain high income/high wealth individuals may be means-tested out of some of their social security, but most will receive the full amount. Full benefits will probably be pushed back a couple of years as well, so the age 65 criterium may change by a year or three.

[sow]

@savvy - I'm not necessarily saying that people will have less money in the future, but it may be their intent to use less and live on less.

I understand your example of having $2M in a 401k and not tapping into it. But then my question is what was the point? Why have the 401k or IRA if you're not going to tap into it? Because of taxes? So, then the savings in tax comes at the cost of not enjoying the asset that you worked so hard to achieve. (By the way, if you won't tap into it, Uncle Sam will.)

I agree that the wealthy understand how to structure their finances to give them the maximum benefits while minimizing taxes as much as legally possible. But I also believe the truly wealthy don't use Qualified Retirement Accounts either.

@rwh - Although you may have fewer work-related expenses, you still will have other increasing expenses: medical costs, property taxes, technology change, etc. Let's take technology change. Who would've thought that the vhs/vcr would be replaced? Analog TVs will become obsolete in 2009. You'll have to purchase an adapter or need to switch to digital service. Things like this will erode your money as time goes on.

[sow]

...actually...I should say that I don't think the truly wealthy use Qualified Retirement Accounts to accumulate money...

[savvy]

@ sow - I agree that the truly wealthy don't use those retirement vehicles either. In my earlier example, I didn't mean never tap into the 401k or IRA funds. I was simply illustrating how one could be in a lower tax bracket at retirement without being "poor".

Personally, for my own retirement, I plan to maintain a similar level of spending if not more. However, I don't spend 100% of my income now (20% goes to retirement) so I won't need to replace 100% of my income in retirement, only the 80% that I actually use.

[rwh]

Every time I looked at one of those VHS tapes all I could think of was how much they reminded me of 8-track tapes. So I'm not at all surprised the VCR has gone the same way.

But we spent a couple hundred for our VCR 15 or 20 years ago. We spent about $75 for our DVD player.

My component stereo in college cost almost $1000 in 1970s money. Now I could buy a great stereo system for the same $1000 in 2008 money.

Technology is often cheaper as it advances, assuming you aren't the first on your block with the newest gadget.

[sow]

Or how about those laser discs...the bloated version of the dvd.

My point is, things like this (along with taxes, inflation, lost opportunity costs) erode your money as time goes on.

Even though technology could be cheaper in the future, it still causes us to spend our money on it, (due to changes, inventions, and obsolescence) or be left behind.

-My condolences to those who invested in HD DVD players-

[rwh]

After reading through the comments again I think there was some digression, of which I helped along.

I think the original poster's formula is probably pretty accurate. We make a little over 100k gross and probably about 80k net. If, in 10 years we have a 1 million retirement portfolio and only take out 4 or 5 percent annually that means we fall short of our current gross income by over 50%. Even allowing for Social Security we still fall short, but are closer if the 80% idea is accurate.

In any case, our 500k retirement portfolio is in my opinion a little light for our age (about 50). But most financial advice I have read would indicate we're okay. Maybe I'm just conservative but I tend to agree with the original post.

We're preparing ourselves to work until our mid to late 60s.