Retirement may seem like a faraway goal, especially if you still have a few decades left before you can even think about leaving your job. That can make it challenging to save, because it's tough to tell whether you're on the right track. It's particularly difficult because everyone has a different goal, so you can't really compare yourself to others to see where you stand.
But that doesn't mean there aren't general benchmarks you can use to determine whether you're on the right path to reaching your goal or whether you need to step up your saving game.
By the time you reach age 50, you should be well on your way to having enough saved for retirement. You're likely in the midst of your peak earning years, and with retirement only a decade or so away, your savings window is starting to close. That means by this age, you should have roughly six times your annual income saved.
This number is based on research from Fidelity Investments that assumes workers save 15% of their annual salary every year starting at age 25, dedicating an average of at least 50% of their investment portfolio to stocks over their lifetime, and plan to retire at age 67 and maintain their pre-retirement spending levels.
Seeing these numbers in action
Six times your annual wages may seem like a lot of money -- and it is. But you'll need a lot of money to be able to retire comfortably, so don't get overwhelmed by the sticker shock.
The average annual salary of workers age 45 to 54 is around $53,000, according to the Bureau of Labor Statistics. So six times that amount is around $318,000. If you're saving the recommended 15% of your salary (or around $8,000 per year in this scenario) and you're earning a 7% annual return on your investments, that means if you have $318,000 saved at 50, you'll have around $1.25 million by the time you turn 67 (conservatively assuming your salary remains the same each year).
Then, to figure out how much of that $1.25 million you can withdraw each year during retirement, you can use the 4% rule. This rule essentially states that you can withdraw 4% of your nest egg during the first year of retirement, then adjust that number each year to account for inflation. So in this scenario, 4% of your retirement savings would be $50,000 -- roughly the same as what you were earning before you retired.
Keep in mind, though, that the "six times your annual salary" suggestion is just that: a suggestion. Depending on the lifestyle you intend to live during retirement, you may need more or less than that. For example, say you're planning on cutting your expenses significantly during retirement. You may plan to downsize your home to lower (or eliminate) your mortgage. Or you may plan to spend your free time lounging at home, rather than traveling or spending money on expensive hobbies.
If that's the case, you may decide you only need, say, 70% of your pre-retirement income. If you were earning $50,000 before retirement, that means you'd need only $35,000 per year once you retire. While it's still a smart idea to shoot for saving $1.25 million, you may not need that much. If you only have, say, $900,000 saved by the time you retire, according to the 4% rule, that would allow you to withdraw $36,000 your first year of retirement.
Working backwards, then, if you're still saving $8,000 per year and earning a 7% rate of return on your investments, that means you'd need to have around $200,000 saved at 50 -- or roughly four times your salary. Likewise, if you plan to spend far more in retirement than when you were working, you'll likely need more than six times your salary saved by 50.
What to do if you're falling behind
If you're like most people, chances are you don't have several hundred thousand dollars saved for retirement. In fact, nearly half of baby boomers don't have anything saved for retirement, according to the Insured Retirement Institute.
But just because you're in good company doesn't mean you can relax. If you're serious about having enough saved to retire in comfort, you'll need to make some near-term sacrifices in order to catch up and get back on track. Many financial experts advise saving 15% of your salary each year to put toward retirement, but if you're behind on saving, you'll likely need to set aside much more than that.
Say, for example, you're 40 years old with nothing saved for retirement. If you want to reach the $300,000 benchmark by the time you turn 50, you'll need to save around $1,800 per month (assuming you're earning a 7% rate of return). If you're earning $50,000 per year, that's around 43% of your salary. Is that doable for most Americans? Probably not. But it's important to be honest with yourself about where you stand financially and how hard you'll need to work to get on the right path to retirement.
Keep in mind, though, that you'll also have Social Security benefits to help bridge that gap. The average retirement beneficiary receives around $1,400 per month, and while that likely won't be enough to live on, it can help if you're struggling to save on your own. To get a rough estimate of how much you'll receive each month, you can check out Social Security's Quick Calculator. It's only a rough estimate based on the numbers you provide, but it can help you gauge you much you can expect.
Once you have that number in mind, you can adjust how much you'll need to save on your own. If you expect you'll need $35,000 per year in retirement and you'll be receiving $15,000 each year through Social Security, then you'll only need to come up with $20,000 per year on your own -- which amounts to a total savings goal of $500,000. With Social Security, though, it's always wise to err on the side of caution and assume you'll be getting less than you think -- it never hurts to overprepare.
Another factor that can help you save more is employer matching contributions. Say you can only contribute 10% of your paycheck to your retirement fund, but your employer will match 3% of that. If you're earning $50,000 per year, that's $5,000 per year you're contributing on your own along with an additional $1,500 per year from your employer. Over 20 years, that $1,500 alone can amount to more than $60,000, assuming a 7% annual rate of return -- that's essentially $60,000 of free money that you don't need to contribute out of your own pocket.
While saving for retirement is challenging, the key is not getting discouraged and giving up. You may need to work longer than you had hoped, and you might have to sacrifice some of the activities you'd wanted to do during retirement in order to save money. But if you never get started, you'll never save anything -- so the best thing you can do is simply take the first step.