What’s the optimal retirement savings by age 30? Age 40? Age 50?
The short answer is “more than most people save.” As you may have heard, Americans (as a general group) are under-funded for retirement.
But you want a tangible benchmark. And we want to illustrate this for you.
In this article, let’s examine how much money three hypothetical people — ages 30, 40 and 50 — need to save in order to enjoy $100,000 per year in retirement.
The Importance of Starting Early: Retirement Savings by Age 30, 40 and 50
Samantha is 30 years old, and enjoys an annual income of $60,000. She has no savings. She has $100 tucked away in a savings account somewhere; nothing more.
Samantha has been thinking about retirement. She recently came across an article talking about the power of compound interest, and realized that the sooner she starts saving, the more compound interest will work to make her retirement dollars go further.
Margaret is 40, also with an annual income of $60,000. She has always meant to start saving for retirement, but has never gotten around to it. She got a wake-up call when a friend shared some details about the success of her own 401(k) plan, and Margaret knows she can’t wait any longer.
Edward is 50, and also makes $60,000. Edward knows there is no time to waste if he realistically wants to retire at age 67, the same age as Samantha and Margaret.
Personalized Goals and Risk Considerations
Samantha, Margaret and Edward sign up with Jemstep.com. They enter personal information, such as their age, salary, goals and risk tolerance. This personalized information is critically important. A one-size-fits-all approach doesn’t work.
Samantha, Margaret and Edward all have moderate risk tolerance levels. They want growth as a primary objective, but they don’t want to hold a large exposure to market volatility. They have the same income. They have zero saved for retirement so far. They want to retire at 67. Their only difference is their current age.
Because all three people have a moderate risk tolerance, they might be assigned to a portfolio that represents 69% US equities, 13% international equities, 17% fixed income, and 1% cash. Let’s also assume that they plan to withdraw 4 percent of their portfolio annually during retirement.**
(Note: We’re giving them the same portfolio composition for the sake of illustration, and to make the comparison apples-to-apples. Your personal portfolio will depend on your age, timeline, risk tolerance, and other personal factors. Jemstep will provide expert advice tailored to your specific situation, with step-by-step guidance to help you build your retirement strategy.)
Start From The Goal, Then Work Backwards
Samantha, Margaret and Edward would all like to earn about $100,00 per year in retirement. (Yes, this is higher than their current income — but they have big dreams.) Is this realistic?
Samantha
For Samantha, the answer is probably yes. Jemstep tells her that she would need to save about $12,600 per year until retirement, based on her current situation. That is not a small percentage of her total current income, but it’s also not out of the question. And she has plenty of years to grow her current income base or find other ways to earn money. Also, by putting the money into a 401(k) plan, she will get annual tax benefits as well as potential matching contributions from her employer.
Samantha has a jump start on Margaret and Edward, because she is positioned to take fuller advantage of compounding. Assuming a 6% average annual rate of return (which is in line with observed historical portfolio performance), a dollar invested today will be worth $8.63 in 37 years from now.
Margaret
Margaret has a steeper hill to climb, and will probably have to either make some lifestyle changes or find sources of additional income if she wants to hit the $100K/year level at retirement. Jemstep says she’ll need $22,000 in annual retirement savings to reach that goal. Of course, Margaret still has 27 years to go before retirement. She should put in as much as she can now (earlier is always better), and see what she can do to improve her chances before it’s too late. Compound interest still works for her, if less so than for Samantha. A dollar invested today would be worth $4.82 in 27 years time, at the same assumed average annual rate of 6%.
Edward
With just 17 years to retirement, Edward would have to invest $45,000 per year to reach the $100K mark, and given his current financial status, that seems unlikely. Compound interest is less of a friend to Edward; a dollar today would be worth $2.69 when he retires.
On the other hand, Edward has managed to live comfortably on a relatively modest income thus far, so he probably doesn’t really need to be making $100K a year in retirement.
What he should do is to use the next 17 years as productively as he can – finding freelance work or odd jobs, cutting back on monthly expenditures – to put himself in the best position. Saving $20,000 per year would get him close to his current income level of $60,000 per year. There’s probably still time to make that happen.
How Can You Solve This for Yourself?
How can you figure out how much you’ll need to save for retirement? Here’s a 3-step plan to set you on track:
Step 1: Define your overall retirement goals.
What do you think you’ll need in retirement? What lifestyle do you want? Do you want to travel the world, renovate your home, buy a condo on the beach, and throw a lavish wedding for your children? Or are you satisfied with a more modest lifestyle?
Look at your current lifestyle for clues. Will you spend 85% of your current expenses during retirement? More? Less?
Do you need $250,000 per year (in today’s dollars?) Or can you live comfortably on $50,000 per year?
Step 2: Assess your current situation.
After you set a goal for the amount you’d like to live on during retirement, take a look at the amount you’re currently on-track to have. Services like Jemstep can give you a customized look at the amount you’re on-track to enjoy during retirement, based on your current nest egg, contributions, investment choices, and other important factors.
Step 3: Mind the gap.
How much are you currently on-track to have in retirement? How much would you ideally like to have in retirement? What’s the gap between those two numbers?
Next, how much time do you have to fill-in that gap? And how much risk are you comfortable accepting?
Don’t Rely on Rules-of-Thumb
You might be familiar with vague rules-of-thumb about retirement planning, such as:
Save 10 – 15 percent of your income
Save enough to replace 70 – 85 percent of your current expenses
Grow your account to 25 – 33 times your annual salary
These are just crude, general rules-of-thumb. They don’t apply to your personal situation.
Jemstep will show you how much money you’re on-track to receive per year during retirement. And it can give you unbiased, clear guidance that could put you on-track to receive even more during your golden years.
In short, it’s a personalized way to answer this “how much do I need?” question.
Retirement Savings by Age — Final Thoughts
In reality, future investment returns depend on a wide range of factors. It is not possible to predict with certainty how much a portfolio may grow within 20 or 30 years.
But if you want to get an estimate on how much you should save for retirement, go through this same exercise using Jemstep. And while you may not be in a position to increase your savings, you can take steps to have more money by making sure your existing portfolio is optimal today. Jemstep is designed to help you earn more on your retirement savings, reduce costly fees, and save on taxes. This is one thing you can do for sure to help put you on track towards a richer and happier retirement.
Are you on-track for retirement? Share your thoughts below.
For an easy way to manage and grow your retirement savings, visit Jemstep.com.
**As a broad rule, your target withdrawal rate will be about 4% per year. That is called the “4% rule,” and the advice is based on historical average investment returns for diversified equity and fixed income portfolios. (Bear in mind that historical averages may not be a reliable indicator of future performance).