Are you wondering if your current savings will be enough to support your future lifestyle in retirement? Use this ‘multiple of income’ table to gauge your retirement readiness and see if you’re on track.
Last week I had the privilege of leading a Planning for Retirement seminar on behalf of the CFA Society Boston. At the start of the discussion, I acknowledged that planning for retirement can be uncomfortable at best, and downright scary at worst. However, most people do feel better when they have a plan in place or have begun working toward a plan.
If you are just beginning your planning process, you can use the table below to determine if your retirement savings is on track. The numbers are used to calculate the money you should have set aside today in retirement savings (such as 401ks, IRAs and Roth accounts) in order to maintain your current lifestyle in retirement.
Let’s walk through an example by going right to the center of the table. If you are 45 years old and your pre-tax household income is $150,000, take the multiple of 4.8 to calculate the amount of savings you should have today to maintain your lifestyle when you retire in 20 years at age 65. The simple math says your required savings ‘checkpoint’ for today is $720,000 (or $150,000 x 4.8).
It’s important to recognize that everyone’s situation is different, and there’s nothing simple about determining retirement readiness. Each household has their own particular needs, wants and wishes. And this retirement checkpoint is based on a number of assumptions. So the checkpoint that you calculate should be viewed only as a rough guide.
The model that J.P. Morgan Asset Management uses to calculate the retirement savings multiples makes the following assumptions. Gaining some perspective on what’s going on behind the checkpoints helps you understand the assumptions that will impact your retirement plan.
Changing any one of these assumptions can alter the retirement savings multiple, which means your required savings checkpoint could be more or less, depending on how the assumption changes. In addition, another key input for any financial plan is how much you will spend in retirement. The model assumes retirees will spend about 25% less in retirement than when they were working. It also assumes that Social Security will meet about 25% of the retirees’ income replacement need. So your retirement savings (from 401ks, IRAs, Roths and other sources) will need to cover about 50% of your pre-retirement income.
Using the example above, if you are 45 and your household income is $150,000 and stays fairly constant to retirement, the model anticipates that you’ll need about $112,000 per year when you retire. You’ll get an estimated $37,000 from Social Security. You’ll have to rely on your retirement savings to meet the rest of your spending needs – in this case, $75,000 per year.
Do you have more questions about your retirement readiness and your particular financial situation? At Laurentide, we help our clients plan, save and invest for retirement. We’d welcome the opportunity to start a retirement readiness conversation with you. Contact us.
Rob Kania is Principal and Co-Founder of Laurentide Advisory