Are Your Retirement Savings on Track?

Robert Brokamp (0:03)

Did the amounts in your IRAs and 401Ks have you on the path to financial independence? I discussed where to get the answers to that question this week on the Saturday Personal Finance Edition on the Motley Fool Hidden Gems Investing Podcast.

I'm Robert Brokamp, and you know, figuring out whether you're on track to retire is a pretty complicated calculation involving all kinds of variables and quite a few predictions. Fortunately, help is available. The Internet is full of calculators that can crunch the numbers, and I'll mention a few later on in this episode. Also, a fee-only financial planner can mix professional-grade software with experience, expertise, and determine whether you're on track to retire when and how you want. But what if you're just looking for a quick litmus test to see if you're generally on track? Well, you're in luck. Several financial services firms publish and update age-based savings guidelines and I'm going to provide an average of the benchmarks provided by some of these companies. But first, let's understand the limitations of these benchmarks, right? Because any analysis of retirement preparedness depends on several factors, such as your income replacement rate, which is how much income you need in retirement as a percentage of your pre-retirement income and how your spending will change throughout your retirement, your retirement age and life expectancy, future investment returns, inflation, salary growth, tax rates, the account types that you have, the taxable tax deferred or tax free, and of course what you'll get from Social Security.

When these firms created their benchmarks, they had to base their analyses on their own set of assumptions. So there is some variation from one firm to the other, but perhaps actually not as much as you might expect.

And these guidelines are usually expressed as a multiple of your gross, that is pre-tax household income. So you start with your salary, as well as your spouses if you're married, and then sum up all your savings that will be used for retirement. So don't include assets dedicated to other goals like college savings, and don't include your home equity. Then divide your savings by your income to get your figure.

With all that preamble, let's look at some of the benchmarks. So I took the averages for certain ages from six firms, Ally Bank, American Century, Bank of America, Fidelity, Schwab, and T.Roe Price. So some firms provided a range of savings benchmarks at each age, so I used the middle of that range for these calculations. So here we go. For people who are age 30, the average of these benchmarks say that you should have 0.9 times your salary saved. If you're 40, you should have 2.8 times your income saved. At age 50, 5.2, 60, 7.9. Now these firms, with their assumptions, they often assume different retirement ages. For the folks who assumed a retirement age of 65, that benchmark was 10.1. You should have 10.1 times your income saved before you retire. And for the firms that assumed a retirement age of 67, the number is 9.8 because you don't need as much the later you retire. Now those are very general guidelines intended for a very broad audience. So here are four factors that could determine whether these guidelines are too low or too high for you. So first up, these benchmarks don't factor in other sources of income or wealth beyond social security and a portfolio. So you might have a pension, or perhaps you plan to downsize and move to a smaller home and or a cheaper part of the country when you retire. Or you may expect a big inheritance down the road, though you should always be pretty conservative at that, right? You don't always know what's in someone's estate plan or how much the value of their estate is, and it might be consumed by end of life or long-term care expenses. But if you're very confident you're getting an inheritance, then you could factor that in. The bottom line here is that if you will have other resources in retirement besides a portfolio and Social Security, you may not have to save as much.

A second consideration is your marital status, right? The evidence is clear that single people generally need to save more than married people. And there are a few reasons for this, including the way Social Security is designed. So married people basically have the benefits of economies of scale, right? It's cheaper on a per person basis for two people to live together. If you're married, you have someone to take care of you. If you're sick or you need long term care, whereas a single person may have to pay for those services. So single people generally need to save more. And actually the report from Tiro Price that has their benchmarks shows the differences in savings rates for married people and single people.