Setting Retirement Savings Goals
By Deborah Baker, CFP
Vice President and Senior Financial Planner
Saving for retirement is a financial goal shared by most of the working population. However, according to some studies, less than half of U. S. workers have actually tried to calculate how much will be needed in retirement, and as such, have not devised a strategy that can lead to a successful retirement funding plan. Many steps are necessary in developing a successful roadmap to fund retirement; the first and most important is to establish a savings’ goal.
The following illustrates a widely used rule of thumb for funding levels needed in retirement according to your age, which thus can serve as your initial savings guideline:
- At age 30 - annual income saved
- At age 40 - 3x annual income saved
- At age 50 - 6x annual income saved
- At age 60 - 8x annual income saved
- At age 67 (or retirement) 10x annual income saved
Accumulating these amounts should help to ensure that your retirement lifestyle approximates 60-80% of your pre-retirement income, which is the suggested amount to maintain a lifestyle to which you have become accustomed in your working years. With these amounts in mind, what are steps to take to reach these recommendations?
Early Savings
Start saving as early as possible and as much as possible; strive to consistently save 20-25% of your income. And to clarify, “saving” means investing! Early in your career, saving for retirement might prove difficult for numerous reasons: student loans, establishing an emergency fund (three – six months’ net pay), or saving for a home purchase. However, do not discount the implications of stashing away even a seemingly insignificant amount for retirement on a monthly basis; saving/investing at a younger age provides the benefit of decades of compounding interest.
Lifestyle
A simple concept in building wealth may be the most important and directly impacts your ability to save as well as limit debt: live beneath your means. And while this is conceptually simple, it is often not easy. The best way to curtail spending is to monitor big ticket purchases, such as homes and vehicles. Plan to budget no more than 30% of your income to housing and follow the “20/3/8 Rule” for vehicle purchases: make a down payment of at least 20%, finance for no more than three years and keep the total car payment(s) at no more than 8% of gross income. Many factors when considering retirement years are out of your control, such as market performance and policy issues like taxes; issues totally within our control are saving/investing versus spending. Focus on what you can control.
Employer-Sponsored Retirement Plans
Take advantage of an Employer-Sponsored Retirement Plan (ESP); such plans are often the most powerful vehicle for investing and provide numerous benefits. Over 90% of employers who provide a retirement plan offer an employee-matching feature, so make sure to contribute enough to fully utilize the matching component. Also, try to consistently contribute the maximum allowable amount annually. Another significant benefit is that retirement plans provide a way to make investing easy. Plans typically offer a variety of investments monitored and selected by professionals – primarily mutual funds with various objectives and Target Retirement Date funds – to which you contribute every paycheck. Younger investors can and should be more aggressive in investing with an emphasis on a long-term perspective.
During the middle working decades of the 30s, 40s, and 50s, there are several issues to which attention should be given when considering retirement funding.
Increasing Income
Income during these years should be consistently increasing, and when this happens, ensure that your savings rate remains consistent at 20-25%. Too often, additional salary dollars get spent on non-essentials instead of being proportionately saved, which leads to “lifestyle creep”—lifestyle levels “creep” up, while savings does not follow. This practice can derail retirement funding goals.
Wealth Accumulation
As more wealth is accumulated, investing becomes more complex. Now is the time to assign funds to an after-tax account, which presents a perfect opportunity to engage professional help with an investment advisor or a financial planner. An investment advisor will provide advice on appropriate investments and then review and monitor accounts, recommending changes based on current economic and market conditions.
College Funding
The middle decades might also be a time when parents contemplate how much to allocate to college savings for children. It is a great idea to fund 529 Plans earmarked for college expenses; however, fund these accounts after contributing the maximum to your employer-sponsored retirement fund and establishing an after-tax investment account. The rationale is that students can receive scholarships, loans and grants, while no such options or opportunities exist for retirement funding. If you must choose between saving for college versus retirement, choose retirement.
Catch-Up Contributions
The fifties decade can be one of “catch-up” for those who might lag retirement funding goals, or simply as an opportunity to save more. Specifically, Individual Retirement Accounts (IRAs) and employer-sponsored qualified retirement accounts contain provisions that allow “catch-up” contributions for those participants 50 years or older. In 2024, IRA owners (traditional and Roth) can contribution an extra $1,000 annually, while qualified plans allow for an additional $7,500 per year.
Finally, ask yourself at what age you want to retire. If earlier than 67, which is the current “Full Retirement Age” (the age at which you will receive full social security benefits) for anyone born in 1960 or later, you will need to revisit and perhaps revise your roadmap. Healthcare coverage can be a major expense prior to Medicare eligibility (age 65), so that issue can impact your decision on when to retire. There are options for successful early retirement, but trade-offs might exist:
- Boost your savings/investing rate from 20-25% to 30-35%. Quite simply, the earlier you want to retire, the more aggressively you need to save. This, of course, results in a lower lifestyle standard while working.
- Evaluate your desired standard of living in retirement. If a reduction in lifestyle (reduction of spending) during retirement is acceptable, you will not need to save/invest as aggressively. Keep in mind that extra activities and luxury items such as travel might be reduced.
- Consider part-time work. Any incoming funds in retirement will help offset the distribution needs from investments, which allows for additional potential growth over the years.
Retirement is a time to relax and enjoy new and different pursuits — and not worry about finances. While practicing the above might seem complicated and overwhelming, it does not have to be when partnered with a trusted advisor. An experienced advisor provides discipline, strategic planning and consistent monitoring to keep you focused and on track for success in retirement. Call an expert at Diamond Capital Management for a consultation.