They say misery loves company, and that could be an ominous sign for retirement saving in the United States.
According to the Employee Benefit Research Institute, most American workers have less than $50,000 in savings and investments.
That's fine if you are still early in your career, but ultimately that level of savings is nowhere near what it would take to afford a comfortable retirement.
Since the average American is well behind in saving for retirement, it would be wise not to look to your peer group for a sense of how well your retirement savings are doing. Instead, plan to do considerably more than the average American worker when it comes to retirement saving.
To help you get an idea of where you should stand, MoneyRates.com calculated a series of age-based benchmarks for retirement saving. Your needs may be greater or smaller than the spending target given in the example, depending on your lifestyle and the size of your family. You can adjust the benchmarks accordingly, but the figures below can give you some insight into roughly where your retirement savings should stand given your age.
Retirement Savings Assumptions
Retirement saving is based on a host of assumptions, and some traditional assumptions may not be appropriate for today's savers. For the purpose of this analysis, here are three of the primary assumptions:
- Spending, not income, is the right target
You might see rules of thumb that base the retirement income you'll need on some percentage of your income while working, but this is a flawed approach.
Income tends to be very uneven over the course of a career, and people may spend different portions of their income. Instead, retirement targets should be based on projected spending needs, with appropriate adjustments for inflation.
- A low-interest-rate environment may dampen investment returns
Assuming your savings program uses a mix of stocks, bonds and cash, this analysis uses a blended annual return assumption of 5.6 percent.
This may seem low compared to some historical return figures, but keep in mind that the national averages of savings account rates and many CD rates are below 1 percent these days, and bond yields are not much higher. This makes it prudent to assume lower returns in the future than have been experienced in the past.
- Taxes are not included in these benchmark targets
Savings can have different tax statuses - they could be after-tax savings, pre-tax savings like 401(k) and traditional IRA balances, or something in between like Roth IRA balances which use after-tax contributions but shelter investment earnings from taxes.
To create a uniform standard, the figures below will be given on an after-tax basis. So, if you have pre-tax savings, you may want to adjust those balances downward by your tax rate for comparison purposes.
Methodology - How We Determine Retirement Savings Targets
According to the Bureau of Labor Statistics, the average person aged 65 or older spends $35,387 per year. That figure is used as the target for retirement spending in this analysis.
Partially offsetting that is the $17,606 of income the average retiree gets annually from social security, according to the Social Security Administration. That leaves $17,781 a year to be funded from retirement savings.
To measure where your retirement savings should be at various ages to put you on track to fund that $17,781 per year, the benchmarks below adjust $17,781 for inflation at 3 percent a year and assume retirement at 65 with a further 30 years of life. That is longer than the current average life expectancy of a 65-year-old, but the higher figure was used both to anticipate the continued lengthening of life expectancy and to reduce the risk of outliving your money.
How Much Retirement Savings You Should Have at Age 25, 30, 40, 50 and 65
Using the methodology above, here are the benchmarks for where your retirement savings should stand at various points in your life:
Retirement savings at age 25
It's difficult to accumulate much in the way of retirement savings before this point in your life; but as you move into your late 20s, it's time to begin putting some money aside regularly. An annual savings goal of $2,500 a year is a good starting point.
Retirement savings at age 30
After just a few years of retirement saving, your accumulated balance is likely to be modest. Having around $12,500 is enough to be on track if at this point you step your annual savings up to around $3,500 a year.
Retirement savings at age 40
As you enter your peak-earning years, you should pick up the pace of retirement savings. You should have over $50,000 saved by now, with another $6,500 a year going toward retirement.
Retirement savings at age 50
This is the home stretch, so you need to really kick it in. Having around $140,000 in accumulated savings and $9,500 in new annual savings are reasonable targets.
Retirement savings at age 65
Given the assumptions described above, it would take the equivalent of about $370,000 in today's dollars at retirement age to make your money last. If you are not there yet, you might want to consider working a little longer.
Bear in mind that these benchmarks are as of today. As time moves along, all of these numbers will grow larger with inflation - so you should adjust your future goals accordingly.
When it comes to retirement, there are many variables pertaining to both your personal situation and economic conditions, so the reality is that no two situations are alike. However, the above analysis should give you a general feel for whether you are ahead or behind in funding your retirement.