Outliving retirement savings is one of Americans’ biggest financial fears. If you’ve been thinking about your 401k contributions, and worrying that you’re not saving enough, it might be time to use a 401k calculator to determine if you’re on track. Here’s what to consider when calculating how much you need to save for retirement, and why it’s so important to start saving early.
What to Consider When Calculating Your 401k Savings
As you consider your 401k savings plan, consider your preferred retirement lifestyle and the age you expect to retire. Having concrete goals over the years will help you better accommodate for retirement savings. Here is a 401k calculator to help you get started on evaluating your retirement savings, followed by what you need to consider as you develop a savings plan.
What Is Your Target Retirement Age?
The average retirement age is 62, though many Americans expect to retire at 66, according to Gallup’s annual Economy and Personal Finance survey. Poor health, unexpected layoffs and other factors can lead to early retirement. Despite this, many Americans are retiring later than in previous years. The average age of retirement between 2002 and 2012 teetered between 59 and 60 years of age, whereas in recent years Americans have retired, on average, at 61 and 62 years of age.
This trend of more Americans retiring later in life can be indicative of economic conditions. As with any financial goal, plan ahead for different scenarios. Consider how early and how late you would be willing to retire, and your target retirement date.
How Long Do Want Your Savings to Last?
The Social Security Commission stated that a man reaching the age of 65 today can expect to live until the age of 84. Women can expect to live to about 86 years of age — or about 20 to 25 years after retiring.
While saving for a 20-year retirement is a good starting point, consider your family history and your current state of health. It’s always better to save too much for retirement rather than too little. After all, the Institute for Health Metrics and Evaluation reported that the average life expectancy jumped another six years between 1990 and 2013.
How Much Will You Withdraw Annually?
As you consider how much you need to save for retirement, keep in mind the 4 percent rule. This rule assumes you will have a 4 percent withdrawal rate on your total retirement portfolio, plus a corresponding amount for inflation. Generally, people live off around 70 percent of their pre-retirement income during their golden years.
While many of your living expenses will go down during your golden years, keep your target retirement lifestyle in mind. If you want to be a frequent traveler in your later years, you’ll need to account for travel costs in your retirement plan.
How Much Do You Have Saved for Retirement?
By the age of 35, you should have the equivalent of your income in retirement savings, according to Fidelity. By 45, you should have at least three times your salary in savings. Within your final years of employment, you should have about eight times your final salary.
Savings of this amount sound like a hurdle, but keep in mind that with regular 401k contributions, a 401k employer match and compound interest, your savings can ramp up quickly over the years. To help you maximize your savings, ask your HR department about your plan’s fees. High 401k fees can eat away thousands of dollars over the years leading up to your retirement.
What Are Your Annual 401k Contributions?
Consider your current 401k contributions and how much they amount to every year. If you feel like you are falling behind on retirement savings, you’ll need to ramp up savings, either by making budget cuts or petitioning for a higher 401k employer match.
Related: 28 Retirement Mistakes People Make
What Interest Rate Do You Expect for Retirement Savings?
The annual returns on your investments depend on your risk tolerance. If you can’t stomach the highs and lows of the market, such as on Black Monday, your savings might grow more slowly over the years. If you are nearer retirement, your portfolio will likely have fewer volatile investments, and thus, lower returns. In general, you can expect annual returns to average between 6 percent and 7 percent.
Calculating How Much to Save for Retirement
The following table shows three individuals who are regularly saving for retirement. Each is expecting to retire at 62, live until 85 years of age and live off of 70 percent of their pre-retirement income. Here is how much retirement income each will have with their annual contributions, and how much they will need to save to meet retirement income goals.
|Millennial Mark||Gen X Gerry||Baby Boomer Betty|
|Contribution Per Year||$3,500||$6,500||$10,000|
|Desired Retirement Income||$24,500||$45,500||$70,000|
|Retirement Income at Current Savings||$34,155||$35,443||$35,259|
|Annual Savings Needed to Reach Income Goal||$2,510||$9,522||$63,975|
|This table assumes an annual rate of return of 6 percent year to year.|
Although Millennial Mark makes low annual contributions through his years leading up to retirement, he will have nearly the same retirement income as Gen X Gerry and Baby Boomer Betty, who have not saved as aggressively for retirement as they should have. So while Baby Boomer Betty might be able to save far more in her later years than Millennial Mark, she will need to save more aggressively in order to catch up to his savings, which have grown over many years with the help of compound interest.
In short, the sooner you start saving for retirement, the less you’ll need to save. Find out roughly how much you need to contribute each year to your 401k to reach your goals.