How much are you saving for retirement? For most people, the answer is "as much as possible." To be fair, it's not a bad answer. In the unlikely event that someone's saved "too much" of a retirement nest egg, they can always choose to give away a portion of their accumulated wealth.
Non-numeric, generalized answers to the question, however, aren't ideal. You're far more likely to meet a specific savings goal than a generalized one since a finite goal allows you to crunch some numbers and map out a clear, step-by-step plan to reach them.
With that as the backdrop, how much should current and future retirees have tucked away at 67 years of age? Keep reading.
The magic number
It's not a number randomly pulled out of a hat, by the way. This is the age at which anyone born after 1960 can claim Social Security and receive 100% of their intended retirement benefits. This might make an important financial difference for many. And, though the average U.S. resident retires a couple of years before turning 67, that's an average skewed lower by a handful of people who hung it up well before reaching this mark. In light of improving healthcare and lengthening lifespans, it's certainly not unheard of for people to continue working until they're nearer to 70 years of age.
So, what's the magic number?
Don't expect an answer to the penny. Rather, consider the following targeted range that will vary from one retiree to the next. Assuming your chief goal is to maintain your standard of living achieved during your working years, you'll want to have saved up between 8 and 14 times your annual salary in the latter stages of your work years. For example, if you're earning $100,000 per year before retirement, you'll need a retirement nest egg of between $800,000 and $1.4 million by the time you turn 67.
That's the suggestion from mutual fund company T. Rowe Price, anyway, although it jibes with tips from Fidelity, brokerage firm Merrill Lynch, and others. Assuming you make risk-appropriate investments with this nest egg, this is roughly the amount of money you'll need to replace the 80% of your work-based income you'll likely need in retirement.
Of course, you'll want to fine-tune this number and how you invest it to maximize your income while minimizing your risk. You'll also want to adjust for inflation as time marches on.
The big 3 "how?" questions to ask and answer
Setting the goal -- even a target range -- is one thing. Reaching and then making it work is another. How exactly does someone put themselves on track to amass this much savings in time for retirement and then make it last all the way through their golden years?
That's three questions with three different answers.
1. How much
The first (and possibly most important) question is this: How much of their salary does someone need to save in order to maintain their standard of living once they're living on their savings?
Unfortunately, there's no set answer since people's salaries tend to change over time, and people work for different lengths of time. If you're willing and able to work a full 40 years, tucking away 10% of each year's work-based income will likely do the trick. If you're thinking you'd only rather work something closer to 30 years, you'll arguably want to raise this savings rate to 15% of your annual earnings.
That's just a rule of thumb, to be clear. There are plenty of great projection calculators out there that can not only help you figure out how much you'll likely have at a particular date in the future but also how much you'll have saved up if you know you'll be able to regularly raise the amount of money you're contributing to the effort.
2. How to allocate
Saving the money is just the first step, of course. You'll then want to do something constructive with it. That's where things can get tricky.
Generally speaking, if you've got 10 or more years until retirement, it wouldn't be wrong to own nothing but growth stocks. Just be realistic. Not all growth stocks are actually worth owning. Some growth stocks are unlikely to produce long-term gains of any sort, no matter how scintillating their backstories may be.
Once you're within 10 years of retirement, you'll want to start shifting away from a high-risk growth allocation to something with more exposure to dividend stocks or reliable value stocks. You don't have to rush this transition, though. In fact, you won't want to. You'll want to use this decade to shop around for the right exit points for existing positions and entry points for new ones. You've got time.
Then, once you're retired (and maybe a year or two before), things change again. This is when you'll want to begin shedding anything you'd feel uncomfortable owning when you must start living solely on your savings. A 50/50 mix of stocks and bonds may or may not be right for you, but it's a good start for many investors.
Regardless of how much of your portfolio you allocate to stocks at this stage, just remember that all stocks ebb and flow. The higher the risk, the greater the volatility. Just make sure you can stick with your holdings when things get hairy.
3. How to make it last
Finally, how do retirees make whatever they saved last? Mostly, it's done by not taking too much out of these savings too quickly, crippling the portfolio's ability to offset these withdrawals with new growth as a result.
Once again, there's no "right" number. If you're overloaded with high-yielding dividend stocks, you'll likely have access to plenty of cash year in and year out without ever being forced to liquidate any of these positions. If you're still too exposed to growth and are forced to sell these positions to meet your retirement spending needs, you may be locking in losses and missing out on a rebound.
Assuming your portfolio is balanced at a healthy 50/50 mix and of sound quality, though, withdrawing 4% of its value should preserve enough of your retirement savings to make them capable of providing comparable income for 30 years. Just bear in mind that selling stocks during down years might shorten this expected lifespan.
Adjust these numbers accordingly, of course, as needed and allowed.
It all starts with a number
First things first, though -- set a target or even a target range. Then, make a plan to meet it. Even if it's not etched in stone, something's better than nothing. See, there's something motivating and even empowering about having a specific goal.
Investment goals are also often more within reach than most people initially believe they are since time typically does the bulk of the heavy lifting when growing a retirement nest egg. You may not need to save nearly as much every year as you might think you do, which makes taking the next savings steps even easier.
Just remember that it all starts with a numerical target.
