By Michael Donahoe
If you’re feeling anxious about your retirement years, you’re not alone. According to a Retirement Confidence Index conducted by SimplyWise, 58% of Americans in September of 2020 are more concerned about their retirement than they were a year ago. (1)
How much you need to save for retirement is a question that everyone should ask. We’ll be honest, though—there is no easy answer. The amount of your retirement nest egg is so unique to your lifestyle, goals, and values that you should be partnering with a financial advisor to answer this question. However, there are a few rules of thumb that can help you start to understand your ballpark figure.
The More You Earn, The More You Save
Every hard worker planning to retire should know this basic rule of thumb: the more you earn, the more you need to save. You probably want to enjoy the same quality of life during your retirement years that you enjoy during your working years. This means you should plan to save enough that will allow you to live on an annual income that is only slightly less than the income you enjoy now.
For example, a worker who earns $60,000 per year might need $50,000 per year in retirement. If they are entitled to a $30,000 Social Security benefit per year, then 60% of their income needs will be met with just Social Security. This worker will need to save enough to have an additional $20,000 per year in retirement income. A nest egg of $500,000 might do the trick.
By contrast, a worker who earns $300,000 per year may have a lifestyle that requires about $200,000 per year in retirement. Many of my physician clients are in this situation. A Social Security benefit of $30,000 per year will only meet 15% of their retirement income needs, so this worker will need to accumulate a nest egg closer to $3 million.
The challenge to save enough for retirement can clearly be more difficult for high earners!
Answer These Questions with Your Financial Advisor
One way you can determine your ballpark figure without more in-depth analysis is to look at your overall savings rate as a percentage of income. If your savings rate is around 20% of your earnings, you’re probably on track. If you’re only saving in the 5-10% range, you may have some catching up to do.
But how much to save toward retirement is clearly a complex question, and the answer will be greatly impacted by a number of factors. Here are 8 essential questions that you should answer with your financial advisor to determine how much you really need to save:
What You Want to Have
- What have you accumulated so far?
- What tax-advantaged retirement savings plans do you have available to you?
- How much have you and your spouse contributed to Social Security over the years?
- Do you expect an inheritance, a pension from your employer, or other resources that can help you meet your income needs in retirement?
- How is your money invested for growth?
What You Want to Do
- When do you hope to achieve financial independence?
- Do you want to simply retire from what you do today, or slow down your work life and earn less for a while?
- What will it cost you to maintain your current lifestyle once you no longer earn wage income?
We Can Help You Retire with Confidence
How much to save for retirement is not a simple question. A professional financial advisor can help you answer these questions and do analytical work to create a retirement savings plan that works for you. If you’re ready to start seriously planning for retirement, call us at (207) 775-1151 or email us at firstname.lastname@example.org.
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Michael Donahoe is the founder and principal of Harvest Asset Group, LLC, an independent, fee-only financial planning and investment management advisory firm in Portland, Maine. Michael enjoyed a successful corporate career in marketing and sales before transitioning to the financial planning profession, founding his firm in 2012, where he now leads the client services team and serves as the firm’s chief compliance officer. Michael earned his MBA degree from George Washington University and completed his educational requirements to earn the CFP® mark of distinction at the University of California, Berkeley. He is a Fee-Only and NAPFA registered financial advisor, a designation which followed the completion of rigorous continuing education requirements. Michael has lived in the Portland area since relocating from San Francisco in 1995 to be closer to family. He is active in community affairs and spends his non-working time enjoying the natural beauty of Maine.