Every stage of life comes with its own responsibilities and financial burdens, which is why it’s important to save money all along the way — whether you’re young or approaching retirement. According to retirement-plan provider Fidelity Investments, the rule of thumb is to save 10 times your income by the time you reach 67.
While some experts may disagree, this ballpark estimate means that in order to be on track for both your retirement and simple everyday living, it’s crucial to keep mindful saving habits throughout all of life’s stages.
Faron Daugs, Certified Financial Planner and founder & CEO of Harrison Wallace Financial Group, offers a good strategy for breaking down how to approach saving at each stage of life. He tells GOBankingRates that he asks his clients — whether they’re 30, 40, 50 or 60 years old — a series of questions he calls “setting up the goal posts.” The questions are:
- How much income in today’s dollars do you feel you’d like coming into the house on a monthly or annual basis?
- What other types of activities will you be doing when you have time in your retirement that you’re not doing today? How much does that cost?
- How do you feel about funding additional healthcare and long-term care policies in the event you need them for asset preservation?
- Do you have other sources of income that will be available to you?
- Do you have longevity in your family?
Daugs says the answers to determine what the ranges of income are that one would like to plan on. From there, as a client’s income grows their lifestyles typically change and their appetite for more expensive items also grows, which results in an update in the projections to reflect those changes. Daugs revisits these questions at least every two years as younger clients participate in financial planning, but even more frequently as they get older. “It is easier for the clients to adjust savings every couple of years if they know what they need to do to achieve the goal rather than finding out too late that your retirement bucket may not last or provide the lifestyle you desire.”
Loreen Gilbert, CEO and founder of WealthWise Financial Services, also lays out what she believes is a reasonable plan. “By the time you are 30, it would be great to own a condo or a house. By the time you are 40, having 2.5x your income. By the time you are 50, having 5x your income and by the time you are 60, having 15x your income and by the time you are 67, having 25x your income.” Gilbert points out there is no linear path to retirement, and that most people are significantly underfunded for retirement when they are younger, raising a family and getting their career going. This then leads to having to make up for lost ground in their 50s and 60s.
Fidelity’s estimate might not be enough, Gilbert adds. Let’s assume you make $100,000 a year. By Fidelity’s assessment, that would mean you should have $1,000,000 saved by retirement. However, $1 million will only provide around 3.5-4% income per year for 25 years, which is actually $35,000-$40,000 per year in addition to an inflation adjustment — not $100,000. So, you need more like 25x income instead of 10x income in order to account for inflation and for lower returns in the future than what we have experienced in the past, Gilbert says.
Overall, a comfortable range for your older years seems to be 10-25 times your salary in order to retire comfortably and adjust for inflation. To reach this goal, it’s important to first make sure you are maxing out your employer-sponsored retirement accounts (like 401(k)s) and maxing out your own retirement accounts (like traditional or Roth IRAs) while you can in order to take advantage of the tax benefits. Saving in your 30s and 40s can seem like an uphill climb, but consistently and automatically putting money away each month into accounts you can’t access for a while puts you one step ahead.
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