Benchmarks for Retirement Savings

[Deleted]

I like that these are a little lower than some other sources (only 1x salary by 35, etc.). I also appreciate the discussion and questioning of the assumptions that go into arriving at these benchmarks.

What do you think?

business.time.com/2012/<wbr>09/21/what-you-should-save-by-<wbr>35-45-and-55-to-be-on-target/

Financial rules of thumb are just that. If you follow them, you have
the satisfaction of knowing that you’ve taken action — but they do not
guarantee you’ll get the results you desire. Still, in the savings game
guideposts can be especially useful. A near-term target will help you
get started, and that’s half the battle.

Fidelity Investments recently put together an age-based savings
guideline with a range of savings goals. It’s meant to prod individuals
into action, which it might—if, that is, the firm’s daunting assumptions
don’t discourage them first.

Here are the guideposts:

• At age 35, you should have saved an amount equal to your annual salary.
• At age 45, you should have saved three times your annual salary.
• At 55, you should have five times your salary.
• When you retire at age 67, you should have eight times your annual pay.
• 
  

Others have tried to divine a finishing multiple
of salary that ensures retirement happiness, and generally they are in
line with Fidelity’s target. Consultants Aon Hewitt set the goal at 11
times final pay (by age 65).

What Fidelity ads to the discussion are benchmarks to hit along the
way. Having near-term targets helps you stay on track—and to take steps
to catch up while time is on your side.

But there is nothing easy about
hitting these targets. Fidelity assumes:

• You begin saving in a workplace retirement plan, such as a 401(k),
  at age 25. You save continuously and without interruption until age 67.
• You start by making an annual salary contribution equal to 6% of
  pay, and raise the figure by one percentage point each year until you
  are saving 12% of pay.
• Your employer matches you at 50 cents on the dollar up to 6% of pay and your portfolio grows 5.5% a year.
• Social Security is factored in.
• Your income grows 1.5 percentage points faster than inflation each year.

These assumptions are reasonable in terms of building an illustrative savings model. But consider that almost no one
starts saving at 25 and millions suffer some sort of job interruption
over a 42-year career. This model also has you saving 12% of pay by age
32. A common rule of thumb is 10% and, again, most folks don’t get
serious about saving until they are in their 40s and 50s.

Meanwhile, you will need a healthy slug of stocks to earn 5.5% a year. Yet individuals have been net sellers of stock mutual funds for at least half a decade. Whether Social Security will be available when you retire is an open question. And many peoples’ wages are going down—not up by more than the rate of inflation.

Of course, it would be a mistake to extrapolate the experience of the
crisis years indefinitely into the future. Still, this exercise points
up the difficulty of reaching retirement security without an early
start, or hyper-aggressive saving at midlife. No matter your age, at
least now you can see where you stand–and what to do about it.

[aspentosh]

Another great article.

I think it's a big assumption to get that kind of match these days. I had no match for years.

[Deleted]

This actually suggests I'm almost on target; I've heard other plans recommend a year's salary by 30 and double by 35. I'm saving, but I'm also taking a cynical view and thinking who knows what the heck retirement will actually look like by the time another 30 yrs passes; not holding my breath.

[Deleted]

Jan 23, 2013 13:27:18 GMT -5 @historychick79 said:

This actually suggests I'm almost on target; I've heard other plans recommend a year's salary by 30 and double by 35. I'm saving, but I'm also taking a cynical view and thinking who knows what the heck retirement will actually look like by the time another 30 yrs passes; not holding my breath.

The old target is 1.6x by 35, not 2x.

[LoveTrains]

Jan 23, 2013 13:27:18 GMT -5 @historychick79 said:

This actually suggests I'm almost on target; I've heard other plans recommend a year's salary by 30 and double by 35. I'm saving, but I'm also taking a cynical view and thinking who knows what the heck retirement will actually look like by the time another 30 yrs passes; not holding my breath.

Right, I had also heard 1x your salary by age 30. I know I wasn't there at age 30, but I just looked and I am there now at age 32. That is at least making me feel less depressed about the whole thing. 

[womet]

Great article. It makes me feel a little better about my retirement savings.

[Deleted]

I actually sent that article to my sibs. I also sent the following:

What Savings Rate You Need When Starting at Age 15, 25, 35 and 50

Most of us are born procrastinators. That’s why we start saving late in life and hope to make up the difference by hitting the lotto or, if we must, by working longer. Neither is a great strategy.

The odds of hitting a Mega Millions jackpot are, of course, insanely long—around one in 176 million. Remarkably, one in three Americans say this is their best shot at financial security. Working longer has its issues as well, especially for low earners and those in physically demanding jobs.

Saving early and letting your gains compound for 40 years is really the best option. To make that point, this Forbes blogger offers an intriguing math question:

“If a wagon train averages 10 miles a day for the first half of the Oregon Trail, how fast does it have to travel the second half to average 20 miles a day for the entire journey?”

The knee-jerk response is, naturally, 30 miles a day. But, as you might imagine, that wouldn’t be worth writing about and isn’t even close to correct. The blog continues:

“If the trail is 2,000 miles long, to average 20 miles a day you would have to travel the entire trail in 100 days. But if you averaged 10 miles a day traveling the first 1,000 miles, you would have already used up 100 days. You would then have to travel the second thousand miles instantly to overcome your slow start.”

That might be apparent to a mathematician. But for most people it’s a surprise—and it describes the predicament of those who start saving late. They face an almost impossible task and are destined to downsize their expectations.

Fidelity Investments recently published a guide as to how much you should have saved by various points in your life in order to be on track. In an encouraging sign, young people seem to be getting started much earlier than their parents. According to a report in the Wall Street Journal:

“Of employees under age 25, 44% participated in their companies’ 401(k) retirement plans in 2011, up from 27% in 2003, according to data on millions of employees whose companies’ retirement plans are managed by Vanguard Group. Of those ages 25 to 34, 63% participated in 2011, up from 58% in 2003.”

For those who start late, though, retirement security is an uphill climb. Here’s Forbes’ analysis of how a late start affects your required savings rate:

Start at age 15, and you need to save 8% of annual income for life.
Start at age 20, and you need to save 11.1% of annual income for life.
At age 25 you need to save 15.4%.
At age 30 you need to save 21.4%.
At age 35 you need to save 30.1%.
At age 40 you need to save 43.2%.

It just gets worse from there, so that if you do not start saving until age 50 you need to save every dime you make. This is just one person’s model, and it all becomes much more feasible if you ratchet down expenses. According to the analysis:

“Saving 100% of your lifestyle sounds impossible, but it is not. If you earn $100,000 after taxes, you must limit your lifestyle to $50,000 and save the remainder. This strategy will allow you to retire at age 65 with a lifestyle of $50,000.”

This exercise dovetails nicely with the Herculean assumptions in the Fidelity report. The point isn’t so much the precise nature of the savings rates cited, but how delaying even as little as five years changes the calculus.

[Deleted]

Jan 23, 2013 13:33:51 GMT -5 womet said:

Great article. It makes me feel a little better about my retirement savings.

You're also FERS, right? Do you consider that in your retirement planning? Assuming we continue working for the federal government (a safer assumption for you than me, I think), it's a pretty big chunk (1/3 of that famous 3 legged stool).

[Deleted]

Jan 23, 2013 13:31:41 GMT -5 @mrsspunky said:

Jan 23, 2013 13:27:18 GMT -5 @historychick79 said:

This actually suggests I'm almost on target; I've heard other plans recommend a year's salary by 30 and double by 35. I'm saving, but I'm also taking a cynical view and thinking who knows what the heck retirement will actually look like by the time another 30 yrs passes; not holding my breath.

The old target is 1.6x by 35, not 2x.

And I think the old one also assumes retiring at 65 (so earlier).

[Deleted]

Social security factored in? So maybe the old numbers are better.

[ssmjlm]

Jan 23, 2013 13:37:53 GMT -5 @totsintosa said:

Jan 23, 2013 13:33:51 GMT -5 womet said:

Great article. It makes me feel a little better about my retirement savings.

You're also FERS, right? Do you consider that in your retirement planning? Assuming we continue working for the federal government (a safer assumption for you than me, I think), it's a pretty big chunk (1/3 of that famous 3 legged stool).

I don't count FERS as part of my personal retirement, but I hope it will help equate things since DH is behind.  I don't have any plans to leave the govt.

I'm only $10k below my annual salary right now at 31, but I've also had significant salary jumps from promotions in the last few years.  I am contributing 18% including match.

[kadams767]

Jan 23, 2013 13:40:45 GMT -5 d0ri said:

Social security factored in? So maybe the old numbers are better.

Has anyone seen any recent SS projections?  I know previous reports had provided an estimate that there were funds in place currently to fully fund SS until X year, partial SS after that without reform, etc.  Anyone know?  I don't think most of us can count on full SS benefits as they stand today, but my money is on at least something. 

[Deleted]

I'd be very happy if this is a good set of guidelines, because it means that we're ahead of the game. Some of the assumptions don't really work for us, but I guess we'll try to make up for them otherwise.

[simpsongal]

I like it b/c it's a little more realistic for the folks who spend much of their 20s in school. I'm turning 30 next month and DH do not quite have our salaries saveed

[Deleted]

Jan 23, 2013 13:39:04 GMT -5 d0ri said:

Jan 23, 2013 13:31:41 GMT -5 @mrsspunky said:

The old target is 1.6x by 35, not 2x.

And I think the old one also assumes retiring at 65 (so earlier).

I thought it was 60, with no other job in retirement and no pension, but I could be wrong.

[Deleted]

I would hope that the inclusion of social security would be at the currently projected percentage rates, not the full amount.

Also, I think it's ok to keep moving the retirement age to the age at which you receive social security and qualify for Medicare. While many want to retire before then, I think the "official" retirement age is appropriate for most. Obviously if you want to retire before that you will have to save more.

[womet]

Jan 23, 2013 13:37:53 GMT -5 @totsintosa said:

Jan 23, 2013 13:33:51 GMT -5 womet said:

Great article. It makes me feel a little better about my retirement savings.

You're also FERS, right? Do you consider that in your retirement planning? Assuming we continue working for the federal government (a safer assumption for you than me, I think), it's a pretty big chunk (1/3 of that famous 3 legged stool).

I am FERS, But I don't consider it at all in my retirement calculations. Just like I don't expect SS to be around when I retire. I guess if I do factor FERS into my retirement thinking, I'm doing much better than I expected.

[hski2349]

Jan 23, 2013 13:33:27 GMT -5 LoveTrains said:

Jan 23, 2013 13:27:18 GMT -5 @historychick79 said:

This actually suggests I'm almost on target; I've heard other plans recommend a year's salary by 30 and double by 35. I'm saving, but I'm also taking a cynical view and thinking who knows what the heck retirement will actually look like by the time another 30 yrs passes; not holding my breath.

Right, I had also heard 1x your salary by age 30. I know I wasn't there at age 30, but I just looked and I am there now at age 32. That is at least making me feel less depressed about the whole thing. 

I have heard the same thing.  My current retirement savings is very close to my current salary.  I am a couple thousand short.  But that does not include yearly bonuses.  We typically get a bonus each year.  

If you receive a bonus each year and you have a rough idea of what it is, do you count that as part of your salary and then say you should be saving more to match that?  I am not currently doing that.  But at our company we have to specifically tell our payroll person that we want to do a 401k contribution when we receive our bonus, otherwise they will not.  I always make sure to do that 401k contribution, and I know 90% of the people decide not to. 

[Deleted]

Eh, I feel like things are so variable that these benchmarks are helpful but I can't take them too seriously. For instance, if you don't include our mortgage (which will be paid off in 15 years), student loans, disability/life insurance and savings (all things that will go away before we retire) we live on approx 20% of our gross income. We won't need nearly as high a percentage of our income saved as people who rent and/or spend a much higher percentage of their income than we do.

[Deleted]

They just use salary because that's what you make, but obviously most of us live on much less than that, especially if we're saving a lot for retirement. Also, as Lilly posted out, your expenses are likely to be less in retirement so you might not need as much as your salary to live.

[rebekistan]

Jan 23, 2013 14:16:32 GMT -5 @lilly said:

Eh, I feel like things are so variable that these benchmarks are helpful but I can't take them too seriously. For instance, if you don't include our mortgage (which will be paid off in 15 years), student loans, disability/life insurance and savings (all things that will go away before we retire) we live on approx 20% of our gross income. We won't need nearly as high a percentage of our income saved as people who rent and/or spend a much higher percentage of their income than we do.

It seems like the 8x salary at 65 takes into account that you will have lower annual expenses, because otherwise 8x your salary would last you 8 years, plus whatever you earn on it during those 8 years. 

[Deleted]

Jan 23, 2013 14:16:32 GMT -5 @lilly said:

Eh, I feel like things are so variable that these benchmarks are helpful but I can't take them too seriously. For instance, if you don't include our mortgage (which will be paid off in 15 years), student loans, disability/life insurance and savings (all things that will go away before we retire) we live on approx 20% of our gross income. We won't need nearly as high a percentage of our income saved as people who rent and/or spend a much higher percentage of their income than we do.

But this isn't the case for the vast majority of people. Most people dont earn multiple 6 figures and if they do, they dont live in LCOL. You're a special snowflake.

I think this is a decent guide for a majority of people.

[doobeedoo]

Just out of curiosity and maybe this deserves its own thread, but...
what do you consider "retirement savings"?
Do you count only those amounts in you 401(k)/IRA/Pension? Or do you include the value of other long term invesments such as real estate, stocks, bonds and cash outside of specific retirement vehicles?
I am genuinely curious, because if you go by the value of MY 401(k) and IRA alone, I am off track. But if you include other assets, we're doing okay.

[doobeedoo]

Jan 23, 2013 14:16:32 GMT -5 @lilly said:

Eh, I feel like things are so variable that these benchmarks are helpful but I can't take them too seriously. For instance, if you don't include our mortgage (which will be paid off in 15 years), student loans, disability/life insurance and savings (all things that will go away before we retire) we live on approx 20% of our gross income. We won't need nearly as high a percentage of our income saved as people who rent and/or spend a much higher percentage of their income than we do.

Most retirement calculators I've seen factor in that you will need less to live on in retirement.  I've seen numbers from  70-80% but never as low as 20%.  Maybe somewhere in between is realistic for some, but I doubt most people WANT to live on 20% of what they lived on before if they don't have to.

[winnied]

Thanks for sharing this! I was really excited the other night when I estimated that I will be on track by the time I'm 30 or 35. H will have to catch up but I don't think he'll struggle.

[Deleted]

Thanks for sharing. Our yearly reports came in last week and I was super excited that at 32 I have 1.25 times my annual salary. DH does as well. I save a lot for retirement and alwasy say I want to retire richer than I am now. I want to be able to go on more vacations and not worry about every penny like I do now so maybe its good I am ahead of the game.

[Deleted]

I am slightly ahead of track (I'm going to hit my salary within the next 2 months if the market continues to go up) but H is so so so so so so behind. But there is nothing we can do about it, he can only contribute whatever the IRA max is for the year.

[Deleted]

Jan 23, 2013 15:17:00 GMT -5 @iheartcosmos said:

I am slightly ahead of track (I'm going to hit my salary within the next 2 months if the market continues to go up) but H is so so so so so so behind. But there is nothing we can do about it, he can only contribute whatever the IRA max is for the year.

Not true that you can't do anything about it.  You can have retirement savings outside of tax-advantaged accounts.  To me, it is RIDICULOUS that 401(k)s are so tied to employers and that if your employer doesn't offer one, you can't get the tax advantage.  So I definitely feel for you and others so situated.  But you can put aside the appropriate amount money anyway and invest it in ways that are appropriate for your retirement strategy/targets, whether or not it is tax-advantaged.  Lots of people have to do that, for various reasons.

[Deleted]

I like these benchmarks as well as we should be on track with them. My goal is to have 1x our annual salary saved by 35. I also always think the % you'll need to live on in retirement is high as well and we aren't high earners by any means. We have retirement savings, 3 kids in daycare, 3 kids college savings, 3 kids monthly expenses and our mortgage. I know some costs, health care, etc will possibly be higher but they aren't going to equal what we pay for everything else now. Not by a long shot.

[Deleted]

Jan 23, 2013 15:20:29 GMT -5 v said:

Jan 23, 2013 15:17:00 GMT -5 @iheartcosmos said:

I am slightly ahead of track (I'm going to hit my salary within the next 2 months if the market continues to go up) but H is so so so so so so behind. But there is nothing we can do about it, he can only contribute whatever the IRA max is for the year.

Not true that you can't do anything about it.  You can have retirement savings outside of tax-advantaged accounts.  To me, it is RIDICULOUS that 401(k)s are so tied to employers and that if your employer doesn't offer one, you can't get the tax advantage.  So I definitely feel for you and others so situated.  But you can put aside the appropriate amount money anyway and invest it in ways that are appropriate for your retirement strategy/targets, whether or not it is tax-advantaged.  Lots of people have to do that, for various reasons.

Ditto. If we only saved in "retirement" accounts, we'd be screwed. The vast majority of our "retirement" savings is not in specific tax advantaged accounts.