How To Know If You’re Really Saving Enough For Retirement Based On Your Situation

October 09, 2018

Ever wonder if that 6.2% of each paycheck (or so) that you are socking away into your 401(k) at work is really going to be enough to help you retire comfortable someday? That’s roughly the average amount working Americans set aside in their employer sponsored retirement plans but is it realistic? Will those 401(k) dollars cover your future income needs when you are old and Social Security and your own savings are all you have?

This is one of the more common questions we get as financial planners, and there’s not a straight “yes” or “no” answer – we are the ones who will respond with that annoying, “it depends,” answer when asked. Rather than annoy you further, let’s explore some ideas that might help you see if your efforts are on track and what you can do about it if not.

Who saves what?

First, let’s consider what everyone else is doing – we all like to know where we stand against our peers, no? I ran across a rather disturbing headline lately claiming that approximately one third of Americans have saved less than $5,000 for retirement. This gloomy information comes to us from a Northwestern Mutual 2018 study that also found around one-in-five of us have nothing saved yet for retirement. Depressing. But what does this information mean, really?

When you consider the entire working population, that includes the youngest end of the workforce too, many of whom are busy paying off student loans and racking up consumer debt, so of course they aren’t saving much (if anything) for retirement just yet. I know, because I talk with quite a few of them on a daily basis and help them turn that statistic around.

The National Institute for Retirement Security also backs me up on this observation, citing their own research showing 66% of the Millennial generation has nothing saved for retirement, and 95% of this group are not yet on track with retirement savings. So when you consider that, then it makes sense that the overall statistic seems dire.

Older = wiser (and save-ier?)

I pondered this further and wondered if things get better as we get older, more experienced at life in general, and (hopefully) earn more money as our careers progress. Logically that makes sense, but my own experience reminds me that logic and human behavior are not always closely correlated. A study from the Economic Policy Institute does support the notion that retirement savings are noticeably higher after age 31 and generally increase as we approach retirement age. However, this same study also suggests retirement savings rates across the board are lower than they should be.

How much IS enough?

A common and helpful rule-of-thumb suggested by many financial planners is a 70%-80% income replacement ratio is the right amount to save. If you can retire with enough income from both Social Security and your retirement savings to replace between 70% and 80% of your pre-retirement before-tax income, you are likely on track with your retirement savings. People with lower incomes or considerable amounts of debt when entering retirement may need a higher ratio of 90% or even 100%. Those with more frugal lifestyles, greater savings, higher working incomes or less (no) debt might find a 60% income replacement ratio works just fine.

The tricky part is estimating your potential income so far out in the future. Fortunately, several handy online calculators are available. Here at Financial Finesse, we are rather fond of our Retirement Estimator Calculator. Similar retirement income calculators are available online as well, such as these:

Taking your next steps

If you find your savings efforts are on track, awesome! Keep doing what you are doing.

But what if there is a gap? What can you do beyond the obvious (and highly recommended) moves of spending less, saving (or earning) more money, or planning to work longer? Based on data and observations compiled within Prudential’s 2018 Retirement Preparedness Survey, an important step is finding ways to become more mindful of and focused upon our controllable financial behaviors, such as:

  • Becoming more knowledgeable about investments and how they work. Understanding market dynamics can not only help us make better investment decisions, but we can also avoid getting panicky and making a wrong move when investment markets become uncertain.
  • Being willing to take reasonable investment risks. While keeping your money out of the stock market altogether may seem like a safe bet, inflation then becomes your enemy and robs you of purchasing power as the cost of living outpaces your modest investment earnings. Asset allocation, on the other hand, becomes your friend as you spread the investment risk among a mix of cash, bonds, and stocks.
  • Consider working with a financial planner. A financial professional who focuses on you first can help you get and stay on track. Ideally, your employer offers access to a planner through a workplace financial wellness benefit, but if not, you can always find a planner on your own.

Making a plan is most of the battle

Wherever you are on your retirement preparedness path, having a clear path to follow is key. As our own Financial Finesse Think Tank’s 2017 Year in Review report concluded, people who commit to making repeated and positive financial changes over time tend to be more confident, twice as likely to be on track for retirement, and half as likely to suffer from unmanageable financial stress. Any time is a good time to check on your retirement planning progress and take your next step.