They say misery loves company, and that could be an ominous sign for retirement saving in the U.S.
According to the Employee Benefit Research Institute (EBRI), most American workers have less than $25,000 in savings. This is the type of problem that can become self-perpetuating: As people look to their peers for examples of how to save for retirement they might be satisfied to find they are doing a little better than most.
But the truth is, retirement saving is in such bad shape nationally that you had better count on doing much better than average to meet your goals.
In conjunction with America Saves Week (February 19-26), here are some age-based benchmarks for retirement saving. Your needs may be greater or smaller than the spending target given in the example, so you may need to adjust the benchmarks accordingly. Still, the figures below can give you some insight into roughly where you should be in saving for retirement at your age.
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. Traditionally, people have tossed around rules of thumb that base the retirement income you'll need on some percentage of your income while working. The problem is that income tends to be very uneven over the course of a career, and different people spend different portions of income. So base your retirement targets on projected spending needs, with the appropriate adjustments for inflation.
- The new interest rate environment is changing income projections. Savings account interest rates are below 1 percent, and CD rates and bond yields are not much higher. Assuming your savings program uses a mix of stocks, bonds, and cash, you'll want to water down your return assumptions to reflect these low yields. This analysis uses a blended return assumption of 5.6 percent to account for the low interest rate environment.
- Taxes are not included. With the popularity of Roth IRAs, retirement savings are often a mix of pre- and after-tax savings. To avoid confusion, all the figures below will be given as after-tax equivalents. Therefore, if you have savings in a pre-tax vehicle, you should adjust the value downward by your tax rate for comparison with the figures below.
Calculating the benchmarks
According to the Bureau of Labor Statistics (BLS), households of people aged 65 years or older spend an average of $36,802 per year. So that figure is the sample target for retirement spending in this analysis.
The EBRI reports that people 65 and older collect an average of $11,249 in Social Security or similar benefits, and the BLS reports an average of 1.7 persons per elder household. That amounts to an average of $19,123 in Social Security income per elder household, leaving $17,679 to be funded from individual saving.
The benchmarks below adjust that $17,679 for inflation at 3 percent a year, and assume retirement at 65 with a further 30 years of life. That's longer than the current average life expectancy of a 65-year-old, but the higher figure was used to anticipate longer life expectancies and to reduce the risk of outliving your money.
Accordingly, here are benchmarks for what a person with average spending habits should be doing about retirement at the following ages as of today:
- Age 25. You may not have accumulated any retirement savings yet, but now's the time to begin. Start with a goal of saving $3,000 a year.
- Age 35. By this age, you should have accumulated about $35,000 in retirement savings, with another $4,500 a year being added.
- Age 45. As you enter your peak earning years, you should pick up the pace of retirement savings. You should have about $100,000 saved by now, with another $7,000 a year going toward retirement.
- Age 55. This is the homestretch, so you need to really kick it in. Having $200,000 in accumulated savings and $10,000 in new annual savings are reasonable targets.
- Age 65. Given the spending assumptions described above, it would take about $370,000 to make your money last. If you're not there yet, you might want to consider working a little longer.
Keep in mind that these are benchmarks as of today. As time moves along, all these numbers will grow larger with inflation.
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 will be alike. However, the above analysis should give you a general feel for whether you are ahead or behind in funding your retirement.