The saying “Failing to plan is planning to fail” applies to many life situations, including when thinking about the golden years. No one wants to fail when it comes to their retirement. However, like other life goals and aspirations, retirement planning takes work and a continued focus. Unfortunately, a lot of Americans are not doing an adequate job when planning for retirement. According to Axios and Fidelity, 52% of Americans are not on track to save enough for retirement. Making matters worse, this statistic applies only to individuals who currently have a 401(k) plan.
Ben Duncanson, CFP® CWS®, Director of Wealth Management at First Federal Bank
Most people find it difficult to accept the reality that they need to live below their means to appropriately save for retirement. This means putting money away for retirement each month on top of other savings. Numerous options exist to accomplish this, including employer retirement plans and solutions through financial institutions.
Saving for retirement should also begin immediately upon entering the workforce. Individuals just starting their careers should aim to save 15% of their earnings for retirement, not including an employer match. This savings plan ensures sufficient personal retirement funds and not having to rely on Social Security. Additionally, the later that retirement savings begins, the more that needs to be saved each month.
These two rules of thumb provide guidance regarding retirement and gauge whether savings is on track or needs to be kicked into high gear.
Multiples of income
To retire at age 67, Fidelity recommends that people have 10 times their income saved and 12 times if they plan to retire at 65 or earlier. Here are savings checkpoints to determine if you’re on track for retirement:
- Age 30: Have a year’s worth of salary saved.
- Age 35: Have twice the amount of annual salary saved.
- Age 40: Have three times the amount of annual salary saved.
- Age 45: Have four times the amount of annual salary saved.
- Age 50: Have six times the amount of annual salary saved.
- Age 55: Have seven times the amount of annual salary saved.
- Age 60: Have eight times the amount of annual salary saved.
- Age 67: Have ten times the amount of annual salary saved.
The 4% rule
The 4% rule means you can safely withdraw 4% of your savings the year you retire — adjust for inflation each subsequent year — and continue your present-day lifestyle. For this rule, it is important to consider how much you currently spend each year and how much you plan on spending annually during retirement. The following calculation can provide the amount needed for retirement based on current spending habits:
- Start with the total amount spent during a year — after taxes, personal income that is spent versus saved.
- Subtract anticipated post-retirement income (Social Security, pension, rental or other income).
- Multiply by 25 for the total amount needed for retirement.
Example:
- Annual spending of $50,000.
- Annual post-retirement income of $20,000.
- $50,000 minus $20,000 equals $30,000.
- $30,000 multiplied by 25 would mean $750,000 is needed for retirement.
First, don’t be overwhelmed by this information as everyone’s situation is unique. However, this may serve as an important reminder that planning for retirement is critical. Second, there are resources and professionals that can assist you with retirement planning, helping to remove a lot of the burden and stress. In addition, a professional financial planner can help you navigate and prepare for asset allocation, taxes and withdrawal strategies. Keep this in mind as you begin to prepare and work toward retirement.
Learn more at bankfirstfed.com/personal-wealth.
