You hear a ton of advice about how much you SHOULD be saving, and where to save, but how do you know whether you’re on track especially if you got a late start to this whole saving thing? Retirement planning calculators can give you false information because of the assumptions that are made and simply because we all have different lifestyle goals, live in different areas with varying salary levels.
Would it surprise you if I told you that you should have 3 times your income saved by the time you’re 40? If you’re 35 and making $65,000 a year, you should have $130,000 stashed away so far. Closing in on retirement at 55? You should have 7 times your income saved. I hope these numbers grabbed your attention! This is, of course, assuming a retirement age of 67 and that you started saving 15% of your income starting at age 25. If you plan on retiring early or have something in mind that differs from your current lifestyle, you will need to adjust accordingly.
Fidelity is great at putting personal finances into perspective and came out with this guide some years ago. The infographic below shows a savings rate of 15%, again starting at age 25, and maintaining that 15% savings rate every year through every pay increase and investing it to earn a 5-6% annual return.
Now a return of 5-6% is very doable but if you’re getting a late start, perhaps its time you consider a more aggressive approach to get yourself back on track. Take a step back and review your willingness, ability, and need to take risk. Your willingness is your personal comfort level of risk when it comes to investing and the volatility that you can emotionally handle, the ability is in reference to what you are actually able to save, and your need to take risk depends on your future needs in order to achieve financial independence in time.
Keep in mind, this is only a rough guideline to see whether you’re on track with your savings goals. Everyone is different and your needs may vary depending on your circumstances and personal goals. Visit with your advisor as they can make sure you’re not taking on too much risk or vice versa in your portfolio. It also is a great time to review how the new tax reforms are going to affect your income as many are going to see their tax rates go down creating a great opportunity to take those savings and catch-up to where you need to be.