Setting financial goals can help you achieve major life milestones -- and there's no goal more important than saving for a secure retirement. Yet, despite the consensus that building a big nest egg for your golden years is crucial, a recent survey from Charles Schwab shows that 54% of Americans don't know how much money they need saved for retirement.
Having a ballpark figure that functions as your target retirement savings number is important for a number of reasons. Once you figure yours out, saving for retirement won't seem so daunting, for starters.
Why you need to know your retirement savings goal
It's important to know your retirement savings goal so:
- You can make sure you're on track to save enough: If you know the total amount you need saved by the time you're ready to retire, work backwards to figure out how much you'll need to save annually to achieve your goal. But, if you have no idea of the actual amount you need, it's impossible to tell if you're on pace for your age. Finding your number will help you know whether you need to adjust your retirement savings upward or risk facing a shortfall. You don't want to squander your money now only to find yourself nearing retirement age and discovering you don't have nearly enough saved.
- Having a goal helps you stay motivated: Research shows setting specific goals -- and tracking your progress -- helps you to actually achieve what you desire. It's much more satisfying to work toward a specific outcome -- such as saving $10,000 per year or $1 million over 30 years -- then to just put money into an investment account to some nebulous end goal.
- You'll know when you're actually ready to retire: If you know how much money you need for retirement, you can easily see when you've hit your target and when you can effectively leave the workforce without worrying about your financial future.
How to set a retirement savings goal
You now know the why behind needing a specific target goal for retirement savings -- but how can you actually set this goal taking your life and your needs into account? There are a few methods for figuring out the amount of money you'll need to save for retirement:
- Aim to have 10 times your final salary.
Most financial experts believe you'll be safe in retirement if you have 10 times your final salary saved. This would mean saving $700,000 if you'll be making $70,000 right before retirement, and $1,000,000 if you're making $100,000 before retirement.
To estimate your final salary, start with the salary you have today, figure out the number of years you have until retirement, and plan for an annual raise of about 2%. If you're making $50,000 today, you'd make $51,000 next year, $52,020 the next year, and so on. It takes just a few minutes to estimate how much you'll be making before retirement -- and then to multiply that number by 10.
- Figure out how much income you'll need your savings to produce.
You could do this by making a sample retirement budget (which is easier if you're closer to retirement) or by calculating that you'll need to replace between 80% to 100% of your pre-retirement salary (depending on your cost of living).
If 80% of your pre-retirement salary is $60,000, and Social Security gives you $18,000 in annual income (the Social Security website can estimate your benefits), your retirement savings must produce $42,000 annually.
Most experts use the 4% withdrawal rule, which says you can safely take 4% out of your retirement account in your first year of retirement, and then adjust upward for inflation each year. To find the number for your circumstances, work backwards: Multiply the annual $42,000 you'll need by 25 for the years of retirement to find the amount at which 4% is $42,000. Based on this calculation, you'd need $1.05 million saved.
Set your retirement savings goal today
As you can see, setting a retirement savings goal is pretty simple -- and it's worth doing so you invest the right amount of money each year of your working life to hit your goals for retirement.
Choose one of these two approaches to determine your desired nest egg size and you can calculate your goal within a few minutes. Knowing this number will help you know exactly what you're working toward, stay motivated, and monitor your progress to make sure you're on track for a secure future.