How much should I be saving for retirement?
Do you ever feel like your financial life is on autopilot, but you’re not sure what the destination is, or if you’re going the right speed? Maybe you are putting some money away, but you’re not sure if it’s the right amount. What even is the right amount? How do you know? I wish there were a quick answer, but in reality the answer is, it depends!
Option 1: Start with Retirement Spending
One approach is to estimate how much you need to spend in retirement, back out social security, figure out the portfolio size you’ll need to support that level of annual spending, and then calculate how much to save every year to work towards that portfolio. For some people, this can be a great approach and provide a lot of clarity into exactly how much more they need to save before retirement. Unfortunately, if you are farther from retirement, you’re going to be making A LOT of assumptions about your future life. You might not know with any confidence your future salary, your kids’ education costs, where you’ll live in retirement, what your life will look like. So if retirement feels a lifetime away and you try it this way, you might end up with garbage in, garbage out.
Option 2: Rule of Thumb
Another approach is to follow a rule of thumb – saving 10-20% of your income is a common one. This is a lot easier to follow, but might go too far in simplifying. How old are you? How much do you have saved already? What are your goals? Someone starting out very young might want to be at 10%. If closer to retirement and catching up, 25% might be the number to target. Someone with more pressing needs, like credit card debt or just trying to afford the essentials, might want to be at 0%. It really depends on what else in your life demands your attention at the moment.
The Reality
At the end of the day, you need to live your life today and meet your needs, and you also need to save for retirement. There are no hard and fast rules, and one year doesn’t have to look the same as another – you might have a year with childcare expenses, a house purchase, or a career transition. In the financial planning process, we’ll take a look at your current financial situation, what happens if the status quo continues, and what changes you could make. Then we’ll talk through it, set some goals, and revisit them over time. We probably won’t come up with a perfect savings rate. But we’ll figure out whether you’re on track, and how to make adjustments if needed.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
