As you save for retirement, it’s beneficial to know how much to save and whether you’re on the right track. Everyone’s situation is different, of course, but there are some useful retirement benchmarks that can give you a sense of how you’re doing to reach your goals.
After comparing your numbers to the benchmarks, you can then work on making any necessary adjustments and then check your progress regularly.
To set your retirement savings benchmark, you need to consider two factors — how much you’ve already saved for retirement and your current age. Then, compare your savings against your current gross income to begin setting savings goals based on your income.
What is a good retirement savings goal? Many financial institutions and experts have a few guidelines to help answer that question.
Retirement savings guidelines
Fidelity Investments, for example, has created the following set of benchmarks based on ages for people in their 50s and 60s:
|Current age||Ideal amount of retirement savings required|
|50||Equivalent of 6 times annual salary|
|55||Equivalent of 7 times annual salary|
|60||Equivalent of 8 times annual salary|
|67||Equivalent of 10 times annual salary|
Similarly, T. Rowe Price /zigman2/quotes/203200152/composite TROW +0.31% has developed its savings benchmarks and J.P. Morgan /zigman2/quotes/205971034/composite JPM +2.42% has created “ retirement savings checkpoints .”
Another benchmark concept: aim to replace nearly 80% of your current annual income in retirement so you can maintain your lifestyle once you retire.
Of course, the big unknowable is how long will you live and how long should your savings last? For a guesstimate, try using the Social Security Administration’s Life Expectancy Calculator . Here’s an example using the 85% rule and life expectancy estimates:
Say you were born in 1970 (you’re now 51) and want to retire at 67, so you will retire in 2037. And let’s assume your annual income is $40,000. If you expect to live for 20 more years after retiring, you’ll need ($32,000 x 20) = $640,000 in retirement savings.
Be sure to read: What inflation means for your retirement
The 4% rule for retirement withdrawals
Another widely used benchmark, to help you determine how much of your retirement savings you can afford to withdraw each year in retirement, is “The 4% Rule.” As the name indicates, it suggests that you withdraw 4% of your retirement balance annually (adjust for inflation each year after the second year).
For example, if you have $1 million in retirement savings, you’d withdraw $40,000 in year one and from the second year on, it would be $40,000 plus inflation.