You’ve probably been working toward retirement throughout your whole employment history, but are you on the right track? Whether you’re just starting out in the workforce or are approaching the finish line, you want to be sure that your retirement lifestyle stays comfortable. There are a few rules of thumb to figure out how you’re doing when it comes to saving for your financial future.
First, it’s helpful to know what Social Security benefits you’ll likely receive. You can visit your local Social Security Administration office for a benefits estimation. Otherwise, their website offers a retirement calculator.
Next, before diving into various estimation techniques, it’s important to keep in mind the 4 percent rule. This simple rule states that you should annually withdraw no more than 4 percent of your nest egg (adjusted yearly for inflation). If you take more than that, your retirement portfolio will shrink and the funds may run out prematurely.
With that in mind, how large should your nest egg be? Here are three rules of thumb to figure that out:
One strategy suggested by Fidelity.com is to simply multiply your annual income by a ‘savings factor’ to determine your target retirement fund. This approach is quick and simple, but it requires you to observe the 4 percent rule when withdrawing after retirement.
To determine your target retirement fund, multiply your annual income by:
8x for those with below average lifestyles or who plan to retire at age 70.
10x for those with average lifestyles or who plan to retire at age 67.
12x for those with above average lifestyles or who plan to retire at age 65.
For this rule of thumb, you’ll need to first work out a ballpark estimate of what your post-retirement yearly expenses will look like. Next, subtract your expected Social Security income from that. Finally, multiply the remainder by 25. That sum is what you’ll need to have in a fund by your retirement age.
This percentage varies depending on when you begin saving for retirement. If you start at age 25, you only need to reserve 15 percent of your pretax income. If you start at 45, Investopedia.com indicates you may need to save up to 27 percent of your salary and retire later. These numbers may sound intimidating, but two factors are in your favor. Many employers match your retirement contributions up to a certain threshold, so you personally may only need to save 7.5 percent instead of 15 percent of your income. Finally, if you plan to retire a few years later, you won’t need to save as aggressively.
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