What's your magic number? That is to say, how much do you need to retire? And for that matter, when will you need it? These are questions investors have been asking themselves for decades, ever since retirement savings accounts displaced pensions and Social Security as most people's primary source of retirement income.
There's no absolute right answer, of course, since everyone's needs are different. Some people would be fine with less. Others will want more.
Nevertheless, there's a basic rule of thumb that will help you determine your ballpark number.
Image source: Getty Images.
Think in multiples
Most everyone would love to have an unlimited amount of money to spend in retirement. That's not a realistic option, though.
What is realistic, however, is being able to maintain the standard of living in retirement that you enjoyed while in your working years. Tucking away between 10% and 15% of your salary should do the trick for more people.
Except, that's still only a procedural goal. If you don't wisely invest the money you're saving, it doesn't necessarily mean you'll meet your ultimate goal of assuring yourself a well-funded retirement. A specific numerical target actually makes it much easier to develop a savings and investment plan that will get you there, as well as let you check on your progress and make any required adjustments along the way.
With that as the backdrop, at the age of 67, you should have about 11 times your average annual salary you were earning at the latter stages of your career. If you were or are making $100,000 per year late in your work-life, for instance, you'd ideally have at least a little more than $1 million in savings when you turn 67.
That's the suggestion from mutual fund company T. Rowe Price anyway, although it jibes with retirement planning advice from brokerage firm Edward Jones and mutual fund outfit (and retirement plan administrator) Fidelity.
This is just the midpoint of a relatively wide range of serviceable amounts of retirement savings, for the record. You could be fine with as little as eight times your late-career salary saved up, while people with as much as 14 times their highest-earnings might still struggle to fund the lifestyle they've grown accustomed to during their working years once in retirement. How this money is invested in retirement is also a factor.
You get the idea though. Generally speaking, most investors should be able to continue living life as they have while working with about 11 times their late-career salary tucked away for retirement.
But why 67?
So why 67? Why not 62, or 72?
You can certainly retire at an age you wish, to be clear. Just bear in mind that the earlier you retire, the more financially difficult it might be to do so. Retiring five years earlier at the age of 62 will not only mean you miss out on five additional years of contributions to your retirement savings, but will also miss out five additional years' worth of growth of those savings. And given the way compounding works, the last five years of any long-term savings period can make a huge difference in the size of your nest egg.
There's also no requirement that you must stop working at the age of 67. If you're willing and able, you could work another five years after that (or longer) and enjoy an additional five years' worth of contributions to your retirement account as well as its continued growth.
Speaking realistically though, that's much longer than most people care to work even if they can. At the age of 67, you're still usually healthy enough to enjoy most of what life has to offer.
There's another big reason you might want to aim to retire at 67 years of age, though. That is, this may also be the ideal age to begin taking your Social Security retirement benefits.
It's not your only option, for the record. You can claim benefits as early as the age of 62. Just know that doing so will reduce your monthly payment by as much as 30% of what you were intended to receive at your so-called full retirement age -- or FRA -- of between 67 and 68 (depending on when you were born).
Conversely, waiting until you're the maximum age of 70 to begin receiving Social Security benefits adds at least 24% to the size of your payments you'd otherwise receive by claiming at your official full retirement age. As noted, however, waiting that long may be more than most people care to begin their golden years. Claiming at your full retirement age of 67 or 68 years provides you with 100% of your intended Social Security benefit, which when paired with income from your own retirement savings should fund a reasonably nice lifestyle in retirement.
Play the head game
But what if you're nowhere close to this salary-based multiple (or know you won't be when the time comes)? That's OK. Most people don't actually reach this target with their retirement savings. Nor does it matter. Simply having a goal -- any goal -- still better equips you than most investors who are proverbially flying by the seat of their pants. Not having a goal often means you don't have the structure or discipline needed to continue saving and investing even when it's difficult to do so. The thing is, that's often when you end up planting the seeds for the biggest payoffs on your savings efforts.
So, if you haven't yet, set a specific savings goal right now. Then put it in writing. Make it realistic for where you are, but don't be afraid to force yourself to stretch either; your brain often figures out a way of meeting hard-to-reach goals when it knows exactly what you're looking to accomplish. Then work your way backwards from that goal, planning out how much you need to save between now and then and the sort of returns you'll need to see on your savings in the meantime. And once/if you've already done that, set some milestone goals that will keep you on the right pace. You might be surprised by how achievable your goal actually is if you can just get into the habit of taking small but steady steps toward it.
More than anything though, just start somewhere. It all starts with establishing the target.
