So how much should you save? Here's a guide to finding a magic number for your own situation:
The more you make, the more you need to save, not just in dollars also but as a multiple of your final salary. The reason: Social Security payments will provide a smaller percentage of your desired income than they will for Fidelity's typical worker, so you will have to provide more.
Christopher Jones, the chief investment officer of Financial Engines, which provides services to 401k participants, says someone making $150,000 a year at retirement might need 12 times his salary to maintain his standard of living.
The Center for Retirement Research at Boston College took a crack at the problem in 2010. It estimated that people making $150,000 to $200,000 needed to save three times their salary at age 45 and 10.3 times their final pay at age 65.
Underscoring how much assumptions matter, the Boston College center used a higher real rate of return on investments than Fidelity did -- 4.5% versus 3.2%. The center found that retirees needed from four to 10 times their final pay, depending on whether their incomes were below or above average.
If you plan to retire early, you will need to save more -- and you might not have a choice in the matter. In another argument for saving while you are young and sticking with the plan, a survey earlier this year by the Employee Benefit Research Institute, an industry-funded nonprofit, found that half of retirees left work unexpectedly because of health reasons or layoffs.
Your lifestyle matters. The Fidelity model assumes you need to replace 85% of your final pay -- since you will save on payroll taxes, you won't need to add to your 401k, and your work-related expenses will decline. But if you have been saving a lot and your house is paid off, you might be able to live on even less, which will reduce your savings burden.
In addition, if you have been sending children to college and graduate school in your later years, you might find that retirement without those expenses is surprisingly cheap.
Other savings will help. If you have a pension plan, even a small one, it will reduce what you need to save. On the other hand, if you are a conservative investor who is unwilling to take some risks in the stock market, you will need a bigger magic number to compensate for a lower real return.
Retirement experts suggest that once you are in your 50s, you should consult a financial planner or experiment with online calculators to figure out the number you need to support the retirement you want. You will have to do a lot of guesswork, estimating your final pay, inflation and investment returns.
There are too many variables to accurately project the exact number. The best you can hope for is a high probability that you won't outlive your money.
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How much you make is not as important as how much you spend. Being "set" for life is different for every person.
The percentage to save is also based on what you expect your investments to earn in real terms. Therefore, I think the more relevant questions are:
- Where can I save to even get a return after taxes equal to inflation, which doesn’t expose me to ridiculously intolerable risk?
- Where can I save to simply preserve the purchasing power of my money risk free?
- Is that really too much to ask from the financial industry?
I know that Fidelity and Vanguard do their best to provide answers to these questions. But, I suspect the true answers today, thanks to the policies and practices of the Fed and Wall street are: nowhere, nowhere, and yes.
The biggest assumption you'll probably make is that your income / earnings / investments will be enough to carry you through retirement to death.
The reality is that retirees find that they didn't anticipate gas would double ($2-$4), or taxes continue to go up because of voted bond debts, or healthcare costs rise so quickly as you age and require more medications / health aids / assistance.
The retirement of the baby boomers is unprecedented with 1/4 of the total US population being over the age of 65 within the next 15 years. This will cause a large demand for those goods and services that are required to manage the problems of the aged. Inflationary factors will be amplified as demand will exceed supplies / services available. The costs for providing these necessities of the aged could possibly rise exponentially, exceeding normally prudent planning and saving for a historically "normal" retirement.
The same factors that caused the nickel candy bar to become the dollar candy bar will be felt in all sectors and services. The government will be overwhelmed by the seer volume and won't be able to pay for all this extra expense of supporting so many seniors.
To financially plan for this will be daunting at best. The best recourse is to be over prepared financially than under, or face possible poverty in your twilight years.
Until the past decade, this assumed you need 2/3 or 67% of your final pay which I think fits most people who were paying a mortgage until close to retirement and have a mortgage-free home in retirement.
In retirement I don't have the mortgage, I'm not saving for retirement, I'm not paying FICA, a significant amount of my retirement income is shielded from taxes, I don't have work related costs, I have more time to comparison shop and cook my own meals, etc.
On the other hand, some people have significantly higher health costs because they lose their employer's insurance but fortunately Medicare Advantage or Medicare B & D with supplemental insurance keeps costs from being catastrophic. Fortunately for me, my insurance premiums are effectively 75% subsidized by the current workers, not the company, and that's a better guarantee they won't be cut at some point: the current workers know they'll need retirement insurance themselves.
Check with your employer to see if they offer a brokerage account in your 401 (k) plan. my company opened up a brokerage account in our 401 k plan 3 years ago, and I started to really study up myself. I took a huge hit in the 2007/08 debacle, as all my money was in mutual funds. I lost over half of my money in less than a year. Actually finally relented, and bailed at the wrong time. I am almost back to where i was, by doing my own stock investing. Gradually dumped the mutual funds, and in quality dividend paying stocks, of which I reinvest the dividends. Those dividends are free money for owning the stock, so take advantage of it, much like matching with your company match in the 401 k plans. You will have to follow what's going on in your stocks from time to time, or maybe every week, like I do. I am into that kind of thing, so I enjoy it. Spread your investments into different sectors, do some research, and you might be more successful in reaching your goals. Also, learning to not live high on the hog is probably the best approach.
I have nearly doubled my investment in 3 years investing in a MLP. It's in the energy sector, pays "distributions", something like dividends, of which I keep racking up more reinvested shares. It's a 45 billion + company, that is firing on all cylinders. It's about to distribute distributions in a couple of days, which for me, means another cha-ching. Can you guess the company??
Look into high yielding 4% and up companies here in the USA and abroad. Do be aware of the countries that tax your foreign dividends. Energy stocks, drug stocks, BDC's, mREIT's, shipping companies, industrials, consumer staples, some banks, ..basically one or 2 stocks from different sectors. Be your own boss in your retirement account, and you could be a happy camper down by the river in your 40' motor coach!..
Here is the questions you have to answer to determine what you will need:
1) What will the inflation rate be when I retire?
2) What will the tax rate be on my retirement income?
3) What will my health be like? How much will my medical care costs be?
4) How much will SS and Medicare really pay when I need it?
5) What will my investment return on my retirement savings be?
6) How much of my savings will be stolen through hacking, theft, scam artists, etc?
7) How long will I live in retirement?
8) Will the US government collapse and the dollar be worthless? (No amount of saving will help you then)
I would suggest you can't answer any of those questions accurately.
So, you'd better save every penny you can.
8x is definitely not the minimum, since many people will retire with much less and will find a way to get by. Unfortunately that way of getting by may include going back to work or having to ask for help from others, neither of which are part of the retirement that most of us dream of.
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