Figuring out how much retirement savings you need at a certain age is not an exact science. There are different models, and ways of thinking about this topic. You can apply a strict multiplier of your salary regardless of how much you earn, or get more detailed with different savings levels based on levels of income.
Two good, but different models, are from Fidelity and J.P. Morgan. Fidelity puts a strict multiplier based age and salary to determine how much to save by what age. J.P Morgan takes it one step further by changing this multiplier based on your level of income.
Retirement Savings by Age Fixed Model
Let’s take a look at both models and how they play out with different incomes. Fidelity’s fixed model whose multiplier does not change with income is the simpler of the two.
[table “” not found /]Let’s look at how the average person is doing at saving based on these multipliers. According to the Bureau of Labor and Statistics, full-time employees between the ages of 25-34 are earning and average of $41,236 per year. We can use this number since our first age target of 30 is right in the middle of this range. So we should have at least 1x the $41,000 in savings.
The good news is that the Transamerican Center finds the average twenty-something has $16,000 saved, and thirty-something $45,000. If we average those two numbers we get $30,500 which puts us almost right on target. So workers are doing a good job of saving during there early years in the workforce.
But skip ahead a couple decades in life, after a large number of people have added families and mortgages. You start to see a different trend developing, in that people are falling behind on their savings numbers. The average earnings for the age group of 45-54 is $52,208, and at 50 Fidelity recommends you have 6x your salary saved, or approximately $300,000. But the numbers show that full time workers in their 50’s only have $117,000 saved on average for retirement.
Retirement Savings by Age Variable Income Model
Let’s see if J.P. Morgan’s model renders any different results.
[table “” not found /]As you can see, this model has the potential to provide a more precise recommendation because it takes income into account. The assumption here is that you’ll need some percentage of your pre-retirement income to have the same standard of living. J.P. Morgan’s goal is to ensure you have at least an 80% chance of making it through with retirement with no changes necessary. 20% of the time, it then may be necessary to change how much you are spending, or making as income.
This model also does a better job of reflecting the amount of Social Security benefit you will receive. Because that amount drops as a percentage the higher your income level, the more of your own savings that will be needed. That’s why we see the savings multiplier increase as income goes up.
While there are some positives to this approach, the one thing it does not take into account is if you intend to spend far less during retirement, than during your working years. Many people find they spend even less than they predicted on a monthly basis during retirement. No doubt it’s better off to have saved more than less.
Retirement Savings By Age: Twenty-Something
The earlier you can start saving for retirement the better. The Transamerica Center study indicates that twenty-somethings are saving at a decent rate. It also shows they have a healthy awareness that Social Security is not guaranteed for them, and there own savings are important.
It’s important to start saving in your twenties to take advantage of compound growth over time. Most people don’t have a very good idea of how important it really is though. Here’s an example that shows exactly the power of saving early, and the problem with waiting until later in your career.
- Individual A starts saving $5,000/year at age 22 until age 32. If they never save another dime, assuming a 6% annual rate of return, there will be $430,000 in that account at age 62.
- Individual B saves nothing from age 22 until 32, but then begins saving $5,000/year for the rest of their working career until age 62. That account will only have $395,000 available.
Individual A only had to save for ten years, compared to Individual B’s thirty, and A still has more money. It’s hard to believe, but it’s true.
Retirement Savings by Age: The Thirties
In general those in their early 30’s do a good job of saving. That trend has probably increased as of late because younger people are putting off things like marriage and purchasing homes. But as people move into their late 30’s, they begin to increase expenditures. It’s at this age we see people starting families and buying homes, which makes it more difficult to save at the necessary rate.
This can be compounded for those that did not save in their twenties, and are not benefiting from any market growth. Many people in their thirties still believe there is a long time to start saving for retirement. It’s hard to think 30 years in the future to understand what will be needed in retirement. But if people paid attention to these numbers they’d see that savings early is a critical aspect of having enough in retirement.
Retirement Savings by Age: The Forties
At Forty years old, Fidelity recommends you have 3x your annual salary saved. If you’re making $50,000, you need $150,000. If we go by the J.P. Morgan model, you need $80,000 which is a considerable reduction to the target, but still a decent chunk of money.
Regardless of which model we use, forty-somethings are falling badly behind. The average savings for this age group is $63,000, which isn’t close. It’s even more of an issue when you consider that the next two decades may be the most expensive of your life. With growing children and other expenses waiting in the wings, it can become harder to put away more retirement savings.
Retirement Savings by Age: Fifties
If you are not keeping up with savings goals by the time you reach fifty, it’s time to accelerate things. Many people are now at the peak of their earnings potential, and shifting more to retirement savings is important.
Many people are also in a better place in relation to debt during this decade of life, leaving more money for investment. Realizing some big expenses may still exist, like college for children, it’s important to have a clear plan for those expenses, and for a robust retirement savings plan.
Another thing to remember is that you are now able to make catch-up contributions to your retirement accounts. Both your 401k and IRA accounts will allow you to make additional contributions after you turn age 50.
According to the Transamerica Center study, the average savings for people in the fifties is $117,000. That’s a good jump in savings compared to the step change from thirties to forties. But at age 55, the Fidelity model is telling us we need 7x our salary, so where does that put us. The average salary at this age is approximately $50,000, so savings should be closer to $350,000.
Retirement Savings by Age: Sixties
At this point, many people were hoping to be ready for retirement , or have a clear path within a couple years. For those that started saving early, it’s more likely that goal is a reality. But for those who started saving late, and also endured the recession, retirement may still be a number of year in the future.
By this stage of the game, the average retirement savings is up to $172,000. That’s another decent jump in total dollars, but just doesn’t get most people to the number necessary for a comfortable retirement. For this reason we see many people still working, and finding alternative retirement strategies.
Final Thoughts on Retirement Savings by Age
All of these numbers add up to people not being able to retire as early as they once desired. Age 62 or 65 used to be considered the standard retirement ages, but more and more people won’t hit those milestones. In fact, large numbers of people approaching retirement say they may never retire. And many others say they will retire, but keep some time of temporary job for both income and benefit coverage.
If the GenXer and Millennial concerns about the reduction in Social Security benefit come true, it could get harder. There are lots of numbers out there, and recommendations about how much to save. At the end of the day, you need to understand what your retirement plans are, and how much that is going to cost. If you can, use a professional financial planner to help map out how far your savings will take you. If you’re not there, make realistic decisions for both spending and income purposes to make it to your goals.