Americans expect 81% of their retirement income to be sourced through self-funded savings, yet more than half think it is likely they will outlive their savings. That tension can make retirement feel stressful; many younger people simply put off thinking about it.
You may be wondering:
- How much should I save for retirement?
- When will I be able to retire?
- What can I do today to make my future more comfortable?
This article answers those questions and helps you build a realistic view of your retirement prospects.
Laying the Financial Foundation: The Standard Retirement Saving Advice
Your first step to build an effective savings plan is to calculate your retirement needs. While every individual has specific circumstances and goals, there are a few standard “rules of thumb” that can help anchor your estimates:
How Much Do You Need to Save for Retirement?
The Social Security Administration estimates that the average American needs a retirement income that equates to 70% of their pre-retirement income to maintain their lifestyle. While we’ve explored other sources that offer differing opinions, 70% is a reasonable target as a basic guide.
Your retirement savings should enable you to withdraw 70% of your previous income each year. However, the problem is that few people really know how long their retirement will be.
An extra five years of life would require savings equivalent to 350% of your income. Even setting aside potential changes to your financial requirements—such as the need for extra health support or care facilities—the basic margin of error for retirement savings can be substantial.
The problem is more than solvable, though it does mean many retirees need a financial buffer to feel secure in their retirement. This can translate into various concrete steps:
- Investing a portion of your retirement savings to grow, rather than just preserve, your future income
- Increasing your retirement savings goal to create more financial wiggle room
- Reducing retirement lifestyle costs (for example, through downsizing) to lower the financial burden
These are reasonable strategies to improve your retirement finances. However, the most reliable way to build financial resilience in your retirement is simple: start saving sooner.
How Much Should You Have Saved For Retirement at Each Life Stage?
A popular approach is to break retirement savings goals by age:
- Aged 30: Save 1x your annual salary
- Aged 40: Save 3x your annual salary
- Aged 50: Save 6x your annual salary
- Aged 60: Save 8x your annual salary
- Aged 67: Save 10x your annual salary
These milestones can be helpful, especially if you want a quick and easy benchmark to evaluate your savings progress. They can serve as a wake-up call for people who are falling behind; they can provide reassurance for those who want to know their savings are on track.
The problem is these milestones lack context and nuance:
- Your salary is likely to change significantly throughout your life
- Your target retirement age may require much faster saving (the average American now believes they should be able to retire at 58)
- Your capacity to save may not neatly conform to the assumptions baked into these guidelines
But most importantly, your true retirement needs are not fixed: they hinge upon the lifestyle you choose and the vision for the future you build.
Understanding Your Retirement Needs: Building a Vision for Life After Work
Retirement planning without a vision for the future is like prepping ingredients before you know what you’re gonna cook. Not only do you risk having the wrong ratios, but you’ll likely be less motivated if you can’t visualize the end result.
That’s why we encourage our clients to develop a clear vision for their perfect retirement before they think about saving, investing, or anything else. The process typically revolves around four core factors:
1. Housing and Location
Where do you envision yourself living during retirement? Work often tethers people to a particular area, state, or even country; this is your chance to consider whether you would be happier living in a different culture, climate, or social milieu.
There is no obligation to change; many retirees choose to stay in their current homes. But even if it’s simply downsizing to make life simpler (and reduce maintenance costs), you should give real thought to your retirement housing.
2. Friends and Family
How will you maintain contact with friends and family during retirement? Regularly seeing your children or grandchildren is non-negotiable for many retirees, but you have time to consider how that fits your wide vision for retirement—and how it might change your saving needs.
A simple example is travel: you might want to live in a different state, but ensure there is enough spare money to regularly visit your family. You might take this opportunity to move closer to loved ones or build more space into your home so they can stay.
These can be hard questions as they force you to confront competing desires and priorities. But the important thing is you do think about these questions, ideally talking them through with your loved ones to understand their perspective on things.
3. Daily Life
Many people think about retirement as a nebulous fantasy: drinking margaritas on the beach all day. And while that may truly be how some want to spend their time, the fantasy often crumbles under closer inspection.
How do you imagine spending your days during retirement? There might be hobbies and passions you want to pursue; there could be specific chores or activities you actively want to eliminate from your post-work life.
Force yourself to think through the mundane details, because this will help you consider what will actually make you happy—and what is just a nice idea.
4. Legacy
While retirement savings facilitate freedom, many people gain greater meaning in saving for their loved ones’ futures. The legacy you leave via inheritance shouldn’t compete with your retirement fund, but it’s easy to fall into an either/or mentality—especially if you don’t have a comprehensive retirement plan.
Consider how you will balance these two goals. Do you want to set savings aside specifically for your family? Are there specific assets or investments you want to preserve for their benefit? And will your retirement impact what you’re able to leave behind?
These four considerations bring home a simple truth about retirement planning: it’s not just about what you “need”, it’s about what you want—and how your finances make getting it easier and more sustainable.
Rethinking Your Retirement Income: How to Support the Lifestyle You Want
Once you have a clear vision for your retirement, you can calculate what you really need to save using three simple steps:
- Estimate Your Retirement Costs: List the various ways your retirement lifestyle will differ from your existing lifestyle. From extra lifestyle costs to reduced housing costs, you should be able to get a reasonable idea of the total costs. Importantly, you should also factor in increased healthcare and insurance premiums.
- Adjust the Standard Saving Goal: Add whatever extra costs you expect to the standard “70% of your income” figure. This should, in theory, roughly cover the lifestyle you want to achieve.
- Plan for a Buffer: Consider how much you might want to set aside for unexpected costs. Would having an extra few thousand dollars per year be enough to set your mind at ease?
This is a rough guide; a comprehensive retirement plan should go into extensive detail and help you truly map your financial needs across retirement. But for many people, this process provides a reasonable ballpark figure that helps you align your savings and investing with a realistic financial goal.
Note: If you are in your 30s, 40s, or even 50s, there’s a good chance your retirement vision will change significantly in the coming years. Your family might grow or change; your priorities and interests might shift; and your financial situation may look very different.
That does not mean this approach to retirement planning is irrelevant. Your circumstances may change, but your values and personality are probably fairly fixed. The vision you build today is likely to at least rhyme with what you want when you start to approach retirement age.
What Can You Do Today to Prepare for a Comfortable Retirement?
Even if you know exactly what you need for retirement, a sense of unease can linger: am I doing enough to reach my goal—or am I missing opportunities to maximize my future comfort?
That’s why many people choose to work with a financial advisor. With a partner to guide you through the process and help you capitalize on tax-efficient saving plans, the stress and uncertainty of retirement may significantly decrease.
But if you’re not ready to talk to an advisor, you can still gain financial clarity today. Our Retirement Readiness Checklist lets you quickly assess where your finances are on track, and where they could be improved.
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