When it comes to retirement savings, many Americans are worried and perplexed.
Among those issues is the question of how much money households should set away in order to give themselves a good chance of financial security as they age.
According to a 2024 survey by the Bipartisan Policy Center, over half of Americans don’t believe they will be able to retire when they want to and maintain a good lifestyle.
Given that retirement savings is an imprecise science, it is simple to understand why people are uncertain about themselves.
According to Philip Chao, a licensed financial advisor and the creator of Experiential Wealth, a company situated in Cabin John, Maryland, it’s quite difficult to answer that question.
According to Chao, each person’s response is unique. No magic number exists.
Why?
Individual savings rates vary depending on their income and the time they began saving. The value of one’s nest egg and how long it must last are also affected by the fact that nobody can predict when they will quit working, how long they will live, or how their financial situation will change.
However, experts suggested there are a few truisms and guidelines that will help many savers get it right.
15% is ‘probably the right place to start’
According to CFP David Blanchett, head of retirement research at PGIM, Prudential Financial’s asset management division, a 15% overall savings rate is likely the best place to start.
The percentage represents a portion of the saver’s yearly pre-tax income. It includes any funds that employees may get from a company’s 401(k) match.
According to Blanchett, people who make less money, say less than $50,000 annually, can definitely save less—roughly 10%, to be exact.
On the other hand, he noted, higher earners—perhaps those who earn over $200,000 annually—may need to save closer to 20%.
The progressive character of Social Security is the cause of these differences. Compared to higher workers, benefits typically make up a larger portion of lesser earners’ retirement income. Higher earners need to save more money to make up for it.
Chao stated, “I don’t really care about Social Security if I make $5 million because it won’t really make a dent.”
How to think about retirement savings
According to Chao, households ought to understand the fundamentals of their saving.
According to Chao, savings will at the very least assist pay for necessities like food and housing over the decades-long retirement period. Hopefully, there will be extra money to spend on luxuries like vacations.
Usually, a mix of Social Security and personal savings provide this income. According to Chao, households typically require enough money annually from such sources to replace between 70% and 75% of their pre-retirement wages.
No magic number exists.
For employees to be able to sustain their standard of living in retirement, Fidelity, the biggest administrator of 401(k) plans, estimates that replacement rate at between 55% and 80%.
In a research published in October, Fidelity estimated that savings would account for roughly 45 percentage points of that.
According to the business, individuals between the ages of 25 and 67 need save 15% annually to reach that goal. According to the report, people who have pensions can pay a reduced rate.
Starting later also increases the savings rate: according to Fidelity projections, a person starting to save at age 35 would need to save 23% annually.
Here is a simple illustration of how the financial calculus might operate from Fidelity: Assume that a woman of 25 makes $54,000 annually. By age 67, her salary would be $100,000 after inflation, assuming a 1.5% annual hike.
After age 67, her savings would probably need to produce roughly $45,000 annually, adjusted for inflation, to support her lifestyle. This amount represents 45% of her pre-retirement income of $100,000, which is what Fidelity considers to be a sufficient personal savings rate.
The worker would need to save 10% of her pay year, starting with $5,400 this year, for a total of 15% toward retirement because she now receives a 5% dollar-for-dollar match on her 401(k) plan contributions.
But according to experts, 15% won’t always be a reliable estimate for everyone.
According to Blanchett, the more you earn, the more you need to save. Considering how Social Security benefits are adjusted based on your past earnings history, I believe it to be a very significant aspect.
Keys to success: ‘Start early and save often’
According to experts, there are a few factors to overall retirement success.
According to Chao, start early and save frequently. That’s what matters most. According to experts, this provides investments more time to grow and fosters a saving habit.
According to Blanchett, if you are unable to save 15%, then save 5%, whatever you can, even 1%, to help you develop the habit of recognizing that you must save money. When and where you can, get started.
Instead of spending your entire raise, set aside at least a fraction each time you receive one. Blanchett advises reserving a minimum of 25% of every raise. If not, your savings rate will not keep up with your higher-priced lifestyle.
Chao claimed that a lot of people make overly cautious investments. For investments to expand sufficiently over decades, investors need a sufficient mix of assets, such as stocks and bonds. Although they aren’t the best option for everyone, target-date funds offer most people a respectable asset allocation, according to Blanchett.
If at all possible, save for retirement in a tax-advantaged account rather than a taxable brokerage account, such as an individual retirement account or 401(k) plan. According to Blanchett, the latter will often erode more funds because of taxes.
According to Blanchett, postponing retirement is the best way to extend the life of your retirement funds. One warning: Employees cannot always rely on this option to be accessible.
Remember the vesting requirements for your 401(k) match. It’s possible that you won’t get the money until a few years of service.
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