How much should you have saved for retirement? This is a question many families ask themselves today. For many households the amount you save each year can significantly vary due to changing circumstances or infrequent expenses (new car, household repair, etc). This makes reviewing savings checkpoints an incredibly important piece of your annual financial review.
How much you should have saved is ultimately based on a number of personal variables, such as how long you want to work, how much you spend, and your comfort with investment risk. The amount needed can vary significantly based on these factors. However, a helpful starting place is to make some generalized assumptions regarding returns, spending, and retirement dates. This allows you to look at how much you need to have saved given your income and age.
The following chart from J.P.Morgan Asset Management is a helpful guide.
Savings by Income
As can be seen in the chart, higher income earners need to have more money saved at any given age. For example, a family that earns $200,000 a year at age 40 should have approximately 3.4X their income saved or $680,000. The same 40-year-old that earns $150,000 needs 2.9X income or $435,000. This is due to replacing higher spending levels most commonly associated with higher earnings.
Guidance: When income rises, make increasing your savings your first priority. For example, if you receive a 4% raise, increase your 401(k) or other retirement savings by 2%.
Savings by Age
The amount you need to have saved quickly increases with age. From the prior example, the same family that had 3.4X saved at age 40 will need to have 4.7X saved by age 45 and 6.2X by age 50.
While this may seem incredibly difficult, it is derived from the benefit of compound interest (interest earned on your interest) on your investments. This highlights the importance of saving early and ensuring you understand your investments risk and return profile.
Guidance: If you currently have less than recommended savings for retirement, work to gradually increase the percent of your income saved and utilize tax-advantaged accounts.