retirement savings in a jar

It’s a good rule of thumb that your retirement income should be about 80% of your final pre-retirement annual income. You can adjust the amount to account for such sources of income as Social Security and pensions — and even part-time employment. And don’t forget factors like your health and desired lifestyle. You may need more if you wish to travel for much of the time.

How to get to that 80% amount? Consider another formula: the 4% rule. Divide your desired annual retirement income by 4%. To generate $80,000, you’d need a nest egg at retirement of about $2 million. Your life expectancy plays a role in figuring out whether the 4% rule will be sustainable. This strategy assumes you’ll live for about another 30 years in retirement.

If you live longer, you’ll need your portfolio to last longer because there’s a good chance that medical and other expenses will increase as you age. You can stray from the plan for a big purchase, but it will reduce your principal and that will impact the benefit of compound interest, which sustains your income.

Let’s look at saving for retirement by the stages of your life to help you set age-based goals toward retirement:

Some experts recommend saving 15% of your gross salary in your 20s and lasting throughout your working life. This includes retirement accounts, employer contributions and 401(k) plans. Consider these benchmarks based on multiples of your annual earnings:

  • By age 30, have saved one time your annual salary.
  • By 40, two times.
  • By 50, four times.
  • By 60, six times.
  • By 67, eight times.

If you can afford it, consider a more aggressive formula: Save 25% of your gross salary each year, starting in your 20s. It may seem daunting, but don’t forget it includes 401(k) holdings and matching contributions from your employer as well as other types of retirement savings. Whether you follow the 15% or the 25% savings guideline, your actual ability to save will be affected by such life events as job loss.

Are you on target?

You may be anxious that you’re not saving enough. A 2020 survey of currently employed 401(k) plan participants found that saving enough for retirement continues to create significant bouts of stress for many folks. And the COVID-19 pandemic didn’t help. Of the respondents, only 37% think they’re very likely to achieve their retirement goals.

No matter what your age, however, you can always make adjustments for a better future. The key is taking stock of your current financial situation and working closely with qualified financial professionals. It’s never too late to start saving, whether it’s with an IRA, a 401(k) or some other retirement vehicle. The sooner you do it, the better your chance of having a financially secure future.

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