Retirement Savings Benchmarks - Even The Pro's Don't Agree

The magic question about saving for retirement revolves around how much you will really need to save to have your money last for at least 25 years (assuming you retire at age 65). Of course, creating a comprehensive financial plan will help to answer this question with the most detail and reliability, but many people also look for a quick guide to at least get the conversation started. Every day you can find any number of articles about saving for retirement (even though 99% of them are just regurgitated versions of what has been written a thousand times before) that suggest generic benchmarks that are supposed to be helpful. The thirst for these articles is why financial institutions like Fidelity have come up with their own age-based savings benchmarks that suggest, for example, that you should have 10x your annual salary saved by age 67. This amount is meant to replace 45% of your current income, and you would rely on Social Security for anything additional. For someone with a $100,000 salary this would require $1M in savings. Assuming a conservative 3% return and 2.5% inflation rate, this would allow for a $43,000/year withdrawal rate in order for the savings to last until age 90. Since the average Social Security benefit is ~$15,000/year, you would have ~$58,000 in total annual income, or ~$53,000 that is spendable after taxes. Would $53,000/year (53% of the pre-retirement salary) be an appropriate amount to live on for 25 years of retirement if your salary was $100,000/year? Fidelity says it is. Your mileage may vary.

Another benchmark often mentioned in financial advice articles (and repeated by many Financial Advisers) is to plan on replacing 80% of your gross annual income in retirement. This is vastly different than Fidelity's recommendation, and with no mention of how Social Security would figure into this plan. If your income is $100,000 (same as above) this would require $2M in savings and would provide $80,000 in annual income for your money to last until age 90 (with a 3% return and 2.5% inflation). Would you you need an $80,000/year income in retirement? This would be more than you were probably taking home from your $100,000 salary after taxes, savings, etc.. If you include the same Social Security benefit used above (to make these examples apples-to-apples), that would provide a total income of $95,000/year or ~$85,000 that is spendable after taxes (85% of the pre-retirement income). Again, this is likely more than you need/had, causing you to try to save more than really necessary.

The two savings benchmarks above provide vastly different results for equal salaries. How is someone supposed to reconcile the disparity between a $1M savings recommendation that supports a $53,000 net income, and a $2M recommendation that supports an $85,000 net income? Is one way more accurate than the other? Who's right? What if your expenses are only $45,000/year - why save 10x your income, or 80% of your salary? This is the problem with generic benchmarks - they are meant to apply to everyone, but no one in particular, and even the professionals can't agree on a common method.

There is no way to accurately predict the future - even with a thorough and individualized financial plan - so you need to protect yourself from unexpected outcomes instead of trying to calculate an exact savings amount. Rather than relying on random benchmarks to guide you, a little due diligence will likely help you to be better prepared. Here are some steps to take that might help:

• Create an individualized plan based only on your unique circumstances. Whatever  may apply to everyone else has nothing to do with you. Include all "wants" and "needs" in your plan.
• Retire based on your assets, not your age.
• Choose the age to start Social Security benefits carefully. If married, make sure that you understand the best strategy for both of you, individually, and together. You can use our free Social Security Calculator to help.
• Diversify your investments to help protect against various types of market downturns.
• Be aware of the expense ratios for any mutual funds (don't give up more of your money than you need to!).
• Know and track your expenses and cash flow regularly (before and after retirement).
•Track your goals annually and make adjustments as needed.
• Use proven dividend ETF's as one part of your investment strategy - income flow is important.
• Be prepared to pay taxes on distributions from tax-deferred retirement funds (and possibly a portion of Social Security benefits as well, depending on your total income).
• Carefully consider the most efficient strategy for using various funds (cash, taxable investments, retirement savings, etc.). It's often most advantageous to use a mixture of fund types in any given year rather than just one type at a time in order to minimize taxes (see our 5/1/19 blog post for more information).

Retirement planning is not as arduous as some make it out to be, and it's more than worth a few hours of your time to set it up properly. It's mostly common sense combined with a realistic outlook of what is likely to happen/change in the future. No crystal ball needed, just careful forethought. If you have "x", earn "x", and spend "x", with a little variation of earnings and spending in any given year (be conservative, not optimistic), "y" will be the outcome. Adjust your savings and expenses until you are happy with the long term outcome.

As with anything else, having the right tools and information available to help you will make this process easier and faster than you might have thought possible. Just don't be so eager to listen to what others may be doing/suggesting. They don't know anything about you, and free advice often proves to be very costly - wrong answers can be expensive.

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