Social Security won't provide enough income for you to live comfortably during retirement. Rather, you'll need savings of your own to supplement those benefits and ensure that you can cover all of your bills.
But how much savings should you aim for?
Fidelity has long recommended closing out your career with 10 times your ending salary socked away in an IRA or 401(k) plan. And more recently, it changed it guidance to say that 10 to 12 times your last year of working income is a good goal. Yet in a recent survey, only 25% of respondents knew to aim for 10 to 12 times their final salary, and nearly 50% of all respondents thought that target should be five times one's ending salary or less.
If you underfund your retirement plan, you could wind up struggling financially as a senior. Or, you could miss out on the opportunity to do the things you've always wanted to do. And that's a good reason to come up with a savings target that'll meet your specific needs.
Focus on yourself, not a random number
Many people aim to retire with $1 million because it's a nice round number that sounds impressive. But rather than shoot for an arbitrary figure, you're better off calculating your retirement savings goal based on your specific income and needs.
If you end your career earning $60,000 a year and you've always managed to do well on that salary, then there's no reason to push yourself to amass $1 million for retirement when you may be just fine with $600,000 to $720,000 in savings instead.
On the other hand, if you spend the bulk of your 50s and 60s earning around $150,000 a year, then a $1 million nest egg may not cut it if you typically spend your entire salary on living costs.
To figure out how much savings you should aim for, first, think about the lifestyle you plan to uphold as a senior. If you intend to downsize your home, move to an inexpensive town, and entertain yourself locally, then you may not need to save as much as someone with more expensive taste.
Next, think about how you spend your current paycheck. Do you max it out, or do you manage to easily save money month after month? If it's the latter, you may have some wiggle room with Fidelity's formula. The key, either way, is to run some calculations that are specific to you rather than fall back on a random number.
How to boost your savings
While you may be able to get away with less than 10 to 12 times your ending salary in retirement savings, you also don't want to risk falling short. But if you make an effort to follow a few simple rules, you may be surprised at how much wealth you manage to retire with. Those rules are:
- Start early — time is your greatest weapon on the road to growing wealth
- Save consistently — be sure to fund your retirement plan every month, even if you have to make adjustments to allow for other expenses
- Invest aggressively when you're young — loading up on stocks in your IRA or 401(k) could make a huge difference over time
To illustrate how these rules might play out in practice, say you're able to set aside $200 a month in a retirement plan starting at age 22 all the way through age 67. If you load up on stocks so that your retirement plan delivers an average annual 8% return (which is a bit below the stock market's average), you'll wind up with almost $928,000. Make it $250 a month, and you're looking at over $1.1 million.
After years of hard work, you deserve a retirement that's devoid of financial stress. Figure out an appropriate savings target based on your earnings and needs, and then do your part to achieve that goal by the time your career comes to an end.
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