If you want to track your progress toward a goal, chances are there is an app that can do that for you. For example, you can track your steps, your packages, your diet and even your family’s whereabouts.
But when it comes to saving for your retirement, how much time do you spend tracking your progress? And at what point in your life should you start paying attention?
Retirement planning can be intimidating at any age — even more so early in your career. When retirement seems so far in the future, it’s hard to plan for it with so many competing priorities in the present. For example, in addition to your regular bills, you may have student loans to repay. Or you may be trying to save money to purchase a home or save for your kids’ college education.
Still, it’s important to make steady progress toward saving, no matter what your age. Moreover, taking stock of where you stand can help you plan with more intention based on your situation.
So, I’m 35. What Should I Have Saved?
There is a lot of research showing that people tend to rely on approximations or rules of thumb when it comes to financial decisions.
With this in mind, many financial firms publish savings benchmarks that show the ideal levels of savings at different ages relative to an individual’s income. A savings benchmark isn’t a replacement for comprehensive planning, but it is a quick way to gauge whether you’re on track. It’s much better than the alternative some people use — blindly guessing! More importantly, it can act as a catalyst to take action and start saving more.
However, for the benchmark to be useful, it needs to be realistic. Setting the target too low can lead to a false sense of confidence; setting it too high can discourage people from doing anything. Articles on retirement savings goals have generated spirited discussion about the reasonableness of the targets.
Last year, my colleagues and I re-evaluated how to calculate achievable benchmarks. We started with the goal in mind: determining the amount of assets needed by age 65. While that number depends on a lot of factors, income is the biggest one. Since higher earners will get a smaller portion of their income in retirement from Social Security, they generally need more assets in relation to their income. We estimated that most people looking to retire around age 65 should aim for assets totaling between eight and 14 times their preretirement gross income.
From there, we identified savings benchmarks at other ages based on a reasonable trajectory of earnings and savings rates. We didn’t presume that everyone starts saving our recommended 15% of their income immediately upon receiving their first paycheck. Rather, our hypothetical investor starts saving 6% at age 25 and ramps savings up by 1 percentage point each year until reaching an appropriate level. We found that 15% of income per year (including any employer contributions) is an appropriate savings level for many people, but we recommend that higher earners aim beyond 15%.
A Look at the Benchmarks
Considering all this, here are some savings benchmarks for people in the following age groups:
|Half of salary saved today
|1x to 1.5x salary saved today
|2x to 2.5x salary saved today
|2.5x to 4x salary saved today
|3.5x to 6x salary saved today
|5x to 8.5x salary saved today
|6.5x to 11x salary saved today
|8x to 14x salary saved today
Key Assumptions: Household income grows at 5% until age 45 and 3% (the assumed inflation rate) thereafter. Investment returns before retirement are 7% before taxes, and savings grow tax-deferred. The person retires at age 65 and begins withdrawing 4% of assets (a rate intended to support steady inflation-adjusted spending over a 30-year retirement). Savings benchmark ranges are based on individuals or couples with current household income between $75,000 and $250,000. Target multiples at retirement reflect estimated spending needs in retirement (including a 5% reduction from preretirement levels), taxes and Social Security benefits based on the ssa.gov Quick Calculator. See additional details in Are My Retirement Savings On Track?
So, to answer the question, we believe having one to one and a half times your income saved for retirement by age 35 is a reasonable target. It’s an attainable goal for someone who starts saving at age 25. For example, a 35-year-old earning $60,000 would be on track if she’s saved about $60,000 to $90,000.
The Benchmarks for Those Closer to Retirement
The range gets wider as you get older, so we also provide more detailed estimates for people approaching retirement. This helps someone find a realistic target based on age and marital status, which affects Social Security benefits.
How to Stay on Track
The point of benchmarks isn’t to make you feel superior or inadequate. It’s to prompt action, coupled with a guidepost to inform those actions, even if that means staying the course. If you’re not on track, don’t despair. Focus less on the shortfall and more on the incremental steps you can take to rectify the situation:
- Make sure you are taking advantage of the full company match in your workplace retirement plan.
- If you can increase your savings rate right away, that’s ideal. If not, gradually save more over time.
- If you have a company retirement plan that enables automatic increases, sign up.
- If you are struggling to save, many employers offer financial wellness programs or other tools that can help with budgeting and basic finances.
Use these savings benchmarks to get more comfortable with planning for retirement. Then go beyond the rule of thumb to fully understand your potential retirement expenses and income sources. Beyond your savings, think about what you are saving for and how you envision spending your time after years of hard work. After all, that’s the reason why you are saving in the first place.
Roger Young is Vice President and senior financial planner with T. Rowe Price Associates in Owings Mills, Md. Roger draws upon his previous experience as a financial adviser to share practical insights on retirement and personal finance topics of interest to individuals and advisers. He has master's degrees from Carnegie Mellon University and the University of Maryland, as well as a BBA in accounting from Loyola College (Md.).
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