How Do I Know I’m Saving Enough for Retirement?
The fact that you’re even thinking about this question actually puts you ahead of most Americans at the moment. In reality, there are three basic ways most of us deal with the realities of eventual retirement:
Try not to think about it - it’s so far away, something will work out by then.
Try not to think about it - it’s too late to start now, so I’ll just fake it as best I can.
Start doing something about it TODAY, no matter how old you are or what your current financial situation looks like.
In other words, before we talk about how you know whether you’re saving ENOUGH for retirement, we have to start SAVING for retirement. Period. Then it’s just a matter of adjusting up or down along the way.
Let’s Talk Numbers
We might as well address the ideal setup first, but you have to promise me something before we do. No matter how old you are, or what your current situation, you’re not allowed to get discouraged and simply walk away based on some percentages and charts.
ANY savings for retirement is better than NO savings for retirement. ANY reasonable investment in your golden years is better than NO investment.
So far, none of us have figured out how to go backwards and fix whatever we should have or could have done differently in the past. All we can do is start where we are.
With that in mind, let’s talk numbers:
The starting point for answering the classic question, “Am I saving enough for retirement?” is that you want to be able to pay yourself about 80% of your income before retirement once you actually retire.
You get the idea.
The challenges of this rough guideline are immediately obvious. What if you have health conditions which worsen as you age? What if you plan on traveling or doing other fun stuff once you’re no longer working all day, every day? What if the economy changes? What about the next pandemic? Alien invasions? Meteor showers? Unexpected rips in the fabric of time and space?!?
It’s impossible to plan for everything, but if you know you’d like to travel, you’ll need to save more. If you know you’re already not in great health, it would be ideal to have a little extra set aside. The other stuff we can’t really do much about today, so we control the parts we can control and move boldly forward.
Let’s repeat that part:
We must control the parts we can control.
That’s already more than most Americans are doing, unfortunately. But you’ve made it this far in this article, so clearly you’re at least a few steps ahead. Nice.
When Will I Die?
I realize I’m not supposed to put it that way. The subheading should be something like, “For how many years should I plan on having a reliable income from savings and investments?” But they’re the same question, and - in my opinion - once we’re talking about how much you need in order to retire, we can’t really afford to dance around the issues.
I don’t know how long you’ll live after retirement. You probably don’t know, either.
Let me share something terrifying my favorite doctor said to me a few years ago. (Don’t worry - it relates.) He was gently scolding me about my cholesterol and recent weight gain. I joked that it didn’t really matter since I’d probably be dead in ten years anyway.
He very seriously looked me in the eye and say, “Actually, Blaine, with modern medical care advancing as fast as it is, you’ll probably live to be over 100 years old. The real question is, what do you want those last 25 years to be like?”
I dare Jason and his chainsaw to top that in terms of chilling me to the core.
What’s true medically is true financially as well. We should assume we’ll live to be 100 or more, and do our best to plan accordingly. Then, if we don’t make it that far, well… bonus to whoever managed to keep themselves in our will, yes?
The 4% Rule
Let’s keep working with that 80% guideline we mentioned above. How much money is that in total dollars, using average expected lifespans and assuming all sorts of other things work out exactly as planned?
Many retirement experts suggest taking the annual income you hope to maintain in retirement and dividing it by 4% (or 0.04) to give you a dollar amount to shoot for.
I’ll give you a second to catch your breath.
Ideally, I should be shooting for savings and investments of around $3 million by the time I retire in order to maintain my current lifestyle. If you begin in your 20s, you should be able to reach this by saving and investing between 20% - 30% of your total salary each year. (If you begin later in life, you’ll need to invest at a higher percentage.) Keep in mind that this includes whatever retirement your employer automatically manages for you, so the number may not be as wild as it might sound.
Assuming that Social Security is still around and functioning much like it currently does, something in the ballpark of 33% - 40% of your current income will come to you from Uncle Sam each month after you retire.
In the end, we’re still responsible for figuring it out, but it’s not as impossible as it sounds - even if you’re a little late to the party.
Is It Better To Save Or Pay Off Debt?
This is a tricky one, right? Most experts will suggest balancing both, with maybe a little more focus on paying down debt.
Eliminate Debt
Generally speaking, debt is probably costing you more in interest and fees than your savings and investments are bringing in. (This is based on broad averages, so if you’re making more off of your stocks or other investments than you’re paying in credit card interest, then GO YOU.) It thus makes more sense to reduce or eliminate that debt as quickly as possible.
Save Money
On the other hand, you don’t want to add more debt every time you’re faced with an unexpected repair bill or the kids suddenly need new clothes or school supplies. You should try to set aside at least a small emergency fund equal to several months of income. If that’s not possible, try to specifically save a dollar amount equal to one month of income. And if you can’t do that right away, start by saving $500. Or $250. Or $50.
The point is, it’s better to start than to figure it’s hopeless and there’s no point. It’s like weight loss - you can’t lose thirty pounds until you lose ten, and you can’t lose ten until you lose one. The important thing is to begin moving things the right direction.
How Can Goalry Help?
Most difficult tasks are easier when you have support. Many people find that their own successes are more rewarding when they can use them to support and encourage others as well.
There’s also the issue of resources - access to the connections and opportunities some are born into or encounter naturally in their walks of life. Sometimes our struggles are complicated by the fact that the so-called “playing field” is simply not level (and probably never will be). But just because we can’t make everything “fair” doesn’t mean we can’t knock down some hills and fill in some holes. Maybe we can’t fix the entire system, but we can educate ourselves and take advantage of resources that simply weren’t available to everyone a decade or two ago.
At Goalry, we like to talk about “unified finance” and the power of financial education. What that means is that for too long, companies have profited off of the idea that our credit card debt has nothing to do with the interest rates we can secure on a mortgage, or that our retirement plans have no connection to making sure we’re prepared for tax season.
In reality, however, we all have the same three basic relationships with money:
- What we bring in (our income or other resources)
- What we spend
- What we save or invest
Yes, choosing the right car insurance or evaluating the impact of remodeling my kitchen on my home equity require different types of information and decision-making, but the money I spend on either is the same money. Paying down high interest credit cards isn’t the same experience as choosing to refinance my mortgage, but the money involved and the debts incurred all come from the same pool of resources that let me buy lunch on Fridays instead of bringing a sandwich to work.
It’s not all easy to keep straight. The decisions won’t always be simple. But honestly, it doesn’t have to be as hard as it’s often seemed for so many years. Most of the time, when financial decisions are complicated, it’s because someone with more influence than you or I has worked very hard to keep them that way.
Goalry would like to help simplify as much of these various processes as possible. We believe that most Americans are perfectly capable of taking more effective control of their personal or small business finances if given the opportunity and understanding to do so.
At Wealthry.com, for example, you can find all sorts of tools and informations to answer the question we started with: “Am I saving enough for retirement?” The Wealthry blogs are full of free insight and information helping you make sense of everything from the 401k to money market accounts. (We also do some fun stuff with celebrity net worth and how these folks choose to manage their millions. No sense staying too serious all the time, right?)
Learning To App-ly Yourself (See What I Did There?)
Technology is rarely a solution to anything all by itself. What the right technology can be very good at, however, is helping us implement our decisions more efficiently and effectively. Email won’t teach me how to write an effective letter, but it will let me send something very similar over pretty much any distance instantly. Social media won’t teach me how to be more friendly or reasonable (obviously), but it does give me access to people I’d never know in “real life” to try out my social skills. The clerk at the store could probably memorize and type in the prices of everything in my grocery cart, but that little scanner sure makes the process go more quickly!
Well, usually. Until they can’t remember the code for avocados. But MOST of the time, it’s brilliant.
The Goalry App won’t make your financial decisions for you. What it will do is help you make more informed decisions, then implement them more effectively. You want to know whether or not you’re on track for retirement? It will help you figure that out. Want to begin micro-saving with every purchase? Categorizing spending? Evaluating account options? Set reminders for upcoming due dates?
It may not always be easy, but it doesn’t have to be as hard as it’s been in the past.
Whether you’re well on your way to retiring comfortably or way behind what the experts suggest, the solution is the same - let’s start today. You can make it better. And we can help.
Use the Right Budgeting Tool. Meet Budgetry.