The big question every 401(k) and IRA saver asks is: How much do I need to retire?
Retirement is a major stressor for many people. More than half (61%) of Americans age 50 and older worry they will not have enough money to support themselves in retirement, a recent AARP survey found. And 20% of adults told AARP they have no retirement savings.
Adding to the anxiety are surveys that show the huge sums savers think they'll need to make ends meet in retirement. The magic number is $1.8 million, according to 401(k) plan participants surveyed by Charles Schwab last year. Or is it $1.46 million, according to a recent study by Northwestern Mutual? Or $1.1 million, according to working Americans 45 and up responding to Schroder's 2023 U.S. Retirement Survey?
Complicating things is data that show the "average" retirement saver's account balance. It's not close to $1 million.
How Much People Have For Retirement
The average 401(k) balance was just $125,900 at the end of the first quarter, up 16% from March 2023. But it's still well shy of what people think they'll need, says Fidelity, which analyzed more than 45 million 401(k) and 403(b) retirement accounts.
The good news? The savings balances are far less crisislike for long-term savers, Fidelity data show. The average balance for savers who've been investing in the same 401(k) continuously for 15 years was around $500,000, and about $400,000 for those saving for 10 straight years.
"These numbers are a little bit closer to the (lump-sum) numbers that are floating around," said Michael Shamrell, vice president of Workplace Thought Leadership at Fidelity Investments.
'How Much Do I Need To Retire?' There's No Single Number
And the truth is, according to financial advisors, everyone's number is different. "There is no magic number," said Tim Steffen, director of advanced planning at money management firm Baird.
Some people retire earlier or live longer than others. Some people make $100,000, others earn the median salary of $59,228, according to the Bureau of Labor Statistics. And some people live in higher-cost states like New York and California, while others live in more affordable places like Oklahoma and Mississippi.
"There's no one-size fits all when it comes to retirement savings," said Shamrell
Nonetheless, when savers see those big round numbers needed to retire and compare it to what they have in their 401(k), it causes angst.
"If you're making $60,000 a year and you see a story that says you need $1.8 million to retire, is that encouraging?" said Shamrell. "Does that motivate you? Or is that discouraging? Does that make you want to say, 'Why even bother with my 401(k), I'm never going to get to that level.'"
So, how do you estimate what your personal retirement number is?
Retirement Savings Guideposts
One way to get an idea of what you might need is to see where your account balance stacks up versus common guideposts. "Use these rules of thumb" as a starting point, said Rachelle Tubongbanua, a private wealth advisor at U.S. Bank Private Wealth Management.
Fidelity Investments recommends using savings guideposts that focus on two parts of the retirement savings puzzle that are known: your age and your salary, says Shamrell. Variables such as what age you'll retire or how long you'll live or how your investments will perform are harder to predict.
Using Fidelity's guidelines, you should aim to save one times your salary by 30, three times your pay by age 40, six times by 50, eight times by 60 and 10 times by age 67.
Let's run some quick simulations to see how these milestones work.
Earn $45,000 a year? You'll need $450,000 saved by the time you're 67, which is the full retirement age for many Americans and when they can receive full Social Security benefits.
If you make the median pay of $60,000, your estimated savings number is $600,000.
If you earn $100,000, your number rises to $1 million. And if you're a high earner and bring home $250,000, your savings target jumps to $2.5 million.
The take-away: for most people earning $100,000 or less, the guesstimate as to what you'll need to retire is below all three of the lofty projections cited earlier, which ranged from $1.1 million to $1.8 million.
How Much Do I Need To Retire? Take A Deep Breath
Don't look at averages. Instead, dial down to try to get a better gauge of what your personal number might look like.
"Using those (age/salary) milestones give you a gauge of what you might need when you retire, and also tells you where you are on your retirement savings journey," said Shamrell. "It gives you savings milestones to aim for. These numbers are a little more digestible as opposed to these grandiose savings numbers you're supposed to hit 30 or 35 years from now."
They also alert you if there's a savings shortfall that requires you to "pull some additional levers" to reach your goal, adds Shamrell.
Figuring Out How Much Income You Want To Replace
How much of your current income should you look to replace in retirement? Mutual fund company T. Rowe Price says a 75% income replacement rate is a good place to start. The closer you are to retirement, the easier it is to estimate that number. "That number is really customized based on the savers goals and objectives for retirement," said Tubongbanua.
Let's say you want to cover $3,000 in monthly bills once you stop working. That's $36,000 per year. So, using a rough back-of-the-envelope estimate, you'll need $360,000 if your retirement time horizon is 10 years and roughly $720,000 if you need your money to last 20 years. (These guesstimates, of course, don't account for the growth of your retirement account balance that you haven't yet withdrawn or income from other sources, such as Social Security or a pension.)
Run The Numbers To See How Much You'll Need To Retire
Pinpointing how much you'll need for retirement is easier if you work with a financial advisor who will make a few key assumptions. Those estimates are what age you'd like to retire, a guesstimate on your life expectancy, estimated expenses in retirement and any big purchases planned, says Steffen.
"It gives us some idea of how much time we have to work with," said Steffen. You then plug in the numbers, including your current account balance and savings rate and let the computer algorithm do the work.
Math doesn't lie, so you'll quickly get an idea of whether your vision of retirement matches up to the savings you have to fund that lifestyle, adds Steffen. The numbers will determine how big a paycheck your savings can generate for you. "We can only give them (a monthly spending estimated based on) what the computer says will work," said Steffen.
For many people, the numbers could identify a funding shortfall.
How To Fund Your Retirement Savings Shortfall
What are super-savers doing that you can adopt to help you boost your odds of reaching your savings goal? Here are tips to close any funding gap:
First, invest for growth. The old formula of subtracting your age from 100 to get the percent of your portfolio that should be allocated to stocks likely won't get you to where you need to be, says Steffen. Under the old formula, a 65-year-old retiree will have just 35% of his portfolio in stocks. Often, playing it safe or worrying too much about losing money in the short term, can cost you more money in the long run.
"You need to be more fully invested over time," said Steffen. "A retiree might live another 30 years. And with a time horizon like that can afford to have maybe 60% to 70% invested in stocks. One thing people forget is that when you get to retirement, you don't need every dollar you saved on the day you retire," said Steffen.
Don't Forget About Other Income Sources
Your 401(k) isn't supposed to fund your entire retirement. In fact, the average monthly Social Security benefit check of $1,905 accounts for roughly 30% of retiree income, according to the Social Security Administration.
So, if you have $6,000 a month in expenses, your Social Security check will cover roughly one-third and you'll only need to withdraw $4,000 from your 401(k). If you have a company pension, or annuity with a guaranteed income stream or real estate rental income, your 401(k) will have to do even less of the heavy lifting.
"Having that income stream takes a lot of pressure off the portfolio," said Steffen.
Execute Personal Finance Basics
There's nothing magic about boosting a 401(k) balance. Executing the basics will put you on the right track. "Stay on the top of the basic, simple principles," said Tubongbanua.
That means saving as much as possible and building an emergency fund. Fidelity recommends that you aim to save 15% of your income (including your company match.) Reaching your goal also means maxing out your 401(k) contributions if you can. At a minimum, make sure you invest enough to get your employer's match, so you don't leave money on the table. Retirement savers seem to be getting the message, as the average savings rate for 401(k) savers hit a record high of 14.2% of pay (including the match) in the first quarter, according to Fidelity.
Go For Automatic
Automate your savings and make sure you boost your savings rate when you get a raise or bonus. "You want to make sure your contributions increase with your pay," said Tubongbanua.
If your downfall is fleeing the market when volatility spikes, consider investing in a target-date fund. Some determine the right mix of stocks, bonds and other financial assets based on your age and time horizon. "Target-date funds can alleviate anxiety because the saver knows financial pros are managing their money," said Shamrell.
Paying off high interest debt, such as credit cards, is another way to free up savings. And if you're older than 50, take advantage of catch-up contributions to your 401(k) and IRA. The IRS catch-up limit in 2024 is $7,500 for 401(k)s and $1,000 for IRAs.
The biggest mistake people make? Not setting up a financial plan.
"You've got to dive in and understand your current financial situation and goals. And without proper planning it's really hard to accomplish your retirement goals," said Tubongbanua.
