According to a recent survey, Americans are facing a retirement savings shortfall of up to $14 trillion -- which translates to almost $60,000 per adult. If you're a member of this group and are worried about having enough savings to retire comfortably, you're not alone. The good news is that you can still change your situation for the better -- no matter how far behind you think you are.
How much will you need in retirement?
This is a difficult question, because it depends how much you want to end up with. Before you can take stock of how your savings progress is going, you need at least a rough idea how how much you'll need.
While there is no universal formula to use, there are a few helpful guidelines that can point you in the right direction. First, experts say you should expect to need about 80% of your pre-retirement income in order to maintain your quality of life after you retire. In other words, if you make $100,000 a few years before you're set to retire, plan on needing $80,000. Of course, this number could be higher or lower, depending on your circumstances. For example, if your house and car are completely paid off, you may have a lower income requirement. Check out this article for more information on where the 80% guideline comes from and whether or not you'll actually need that much.
Then, subtract any other sources of retirement income, such as Social Security and pensions. For example, if you determine your income need in retirement to be $80,000, and you expect $25,000 in Social Security, your savings will need to make up the $55,000 difference.
Finally, the "4% rule" of retirement is a generally accepted principle that says you can reasonably expect to withdraw 4% of your savings every year, and your money should last as long as you do. Just like the "80% income rule," this isn't perfect by any means, but it's a good place to start. This means if you need $55,000 in annual income from your savings, your total savings goal should be $1.375 million. Use this general formula to figure out yours.
How much should you have saved already?
Now that you know how much you'll need, how can you tell if you're coming up short?
Most employer-sponsored retirement plans provide "projections" as to where your account could end up, so that's a good place to start. While your exact progress depends on when you plan to retire, your income requirements, and how well your investments perform, Fidelity says you should aim to have at least one year's salary in savings by age 35, three times your salary saved by age 45, and five times your annual salary by age 55.
When you compare these suggestions to the actual numbers, it's clear that millions of Americans have some work to do. The average 401(k) balance in the 35-48 age group is $63,600, and $126,900 for those in the 50-67 age group. It's safe to say that this is far short of the salary-related benchmarks I mentioned earlier.
Boost your 401(k) contributions
The good news is that until you're actually retired, there is time to make a meaningful difference. Now, if you're 50 years old with no retirement savings and earn $80,000 per year, you're probably not going to be able to save $1 million. However, you can still make a substantial difference by boosting your savings now.
You may be surprised at how much you're allowed to save in your 401(k). While most people contribute a small percentage of their salary (3%-6% seems to be common) and receive some type of employer match, the contribution limits are often far greater. For the 2015 tax year, the IRS allows elective deferrals (just your contribution, not your employer's) of up to $18,000. If you're 50 years old or older, you're also allowed an additional $6,000 "catch-up" contribution for a total of $24,000.
I'm fully aware that contributing $24,000 per year to a 401(k) isn't practical (or necessary) for most people, but there are some people who could actually part with a large percentage of their salary for a few years -- especially if it means a more secure retirement.
A little can make a big difference
Let's say that you're 50 years old now, earn $80,000 per year, and plan to retire at age 65. But, you have a 401(k) balance of just $100,000 due to starting to save late, and you're worried about not having enough. We'll also assume that you contribute 5% of your salary to your 401(k) and that your employer matches that amount of contributions, so your effective contribution rate is 10% of your salary per year.
Assuming 7% annual investment gains and 2% annual raises, this could add up to about $528,000 by the time you're 65 years old. However, by contributing an additional $5,000 per year from here on out, it could mean an extra $140,000 to your retirement nest egg. In an extreme case, maximizing your contributions ($24,000) each year could result in $1 million 401(k) balance when you retire.
Although contributing more means cutting back on your lifestyle in the meantime, this could make a big difference in your quality of life once you retire.
There's no better time than right now
Even if you're just a few years away from retirement, you still have the ability to make a big impact on your retirement savings, and therefore your post-retirement quality of life. While you may have the ability to contribute up to $24,000 per year to your 401(k), don't underestimate the impact of a smaller contribution boost.
You don't have the time advantage of say, a 30-year-old, but there is still some time for your investments to grow and compound. In order to take full advantage of the time available to you, it's important to contribute as much as you can reasonably afford, and soon as you can.
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