Are You on Track for a Successful Retirement?April 11, 2017
- T. Rowe Price believes that a successful retirement strategy for most investors means saving at least 15% of salary, including any employer match.
- We provide retirement savings benchmarks to help you measure your progress.
- If your savings fall below the benchmarks, there are steps you can take to catch up.
The simple act of setting aside money for retirement on a regular basis is a key step toward achieving your retirement goals. But how do you know if you’re saving enough to sustain the post-career lifestyle you're hoping for? T. Rowe Price provides the following guidelines to help you plan for and monitor your progress against our retirement savings targets.
SETTING A SAVINGS GOAL
A general guideline to consider is to replace about 75% of your preretirement income in order to maintain your current lifestyle in retirement. Most of this money likely will come from your retirement savings, with the rest being drawn from sources such as Social Security benefits, pensions, and other income sources.
You may spend 30 years or more in retirement, so it's important to save enough to generate sufficient income during this period. Life expectancies continue to increase: For instance, a woman retiring 20 years from now at age 67 has an average life expectancy of 881—meaning roughly half of women who are now 47 can expect to live beyond age 88 and into their third decade of retirement. And each extra year of retirement stretches your savings, making it even more important to build up your assets. Saving more now helps you take greater advantage of the power of compounding so you can be prepared.
Increasing your contributions may involve challenging budgetary decisions. To help weigh competing priorities, start by determining how much progress you’ve made so far in saving for your retirement.
T. Rowe Price has developed savings benchmarks for investors of different ages. These targets assume that your retirement will be funded by your personal savings and Social Security benefits in order to replace 75% of your preretirement income. Any possible pension income or other sources are not considered. (See “Take 30 Seconds to Measure Your Progress” for a full description of the Assumptions.) Using our benchmarks, a 35 year old could consider herself on track if she’s saved the equivalent of one year of her salary in her retirement accounts. By comparison, a 55 year old would be off track if she had not saved eight times her current salary.
Compare your current savings with the T. Rowe Price benchmark for your age.
Assumptions: This graph plots retirement savings and age against a line reflecting T. Rowe Price's determination of the appropriate savings amounts for various ages that will provide adequate retirement replacement income for an individual contributing at a 15% rate throughout his or her working life. T. Rowe Price believes that a goal of 12x preretirement salary at age 65 is likely to generate retirement income of 75% of preretirement salary, including Social Security benefits. That view is based on results from the Retirement Income Calculator, a tool that uses Monte Carlo techniques to generate hypothetical projections of balances resulting from savings rates, given certain investment assumptions. In reaching our conclusion, we used "Preparing for Retirement" and tested age 65 salaries of $70,000, $100,000, and $110,000, 40 years of contributions at a 15% rate in a tax-deferred account, a retirement age of 65, and Social Security benefits for a single person beginning at age 65, and a 30 year retirement. For purposes of calculation, we assumed salary increased at 3% annually until age 65, an investment allocation of 60% stocks/30% bonds/10% short-term bonds before retirement (40% stocks/40% bonds/20% short-term bonds after age 65), and a 4% first year withdrawal rate. The tool's methodology and assumptions are explained in detail here. Results were rounded and represent hypothetical outcomes. The savings targets cannot guarantee retirement income of any specific amount, and may not be applicable for those with earnings that vary widely from the tested salaries. The assumptions used may not reflect actual market conditions or your specific circumstances, do not account for plan or IRS limits, and may differ from other saving target estimates. If you use this graph to assess your own retirement savings adequacy, please be sure to take all your assets, income, and investments into consideration.
IMPORTANT: The projections or other information provided by the 30-Second Retirement Challenge regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The information is based on assumptions. There can be no assurance that the projected or simulated results will be achieved or sustained. The information presents only a range of possible outcomes. Actual results will vary with each use and over time, and such results may be better or worse than the simulated results. Clients should be aware that the potential for loss (or gain) may be greater than demonstrated in the simulations.
If you’re off track: Don’t panic
When comparing your total retirement savings to the T. Rowe Price benchmarks, you may find yourself falling short. The two factors that have the most impact on your long-term goals are how much you set aside and how long you save. They also are the factors most within your control.
Focus less on the shortfall and more on the incremental actions you can take to align with your goals. If you can't do so immediately, make plans to take gradual steps over time and consider:
- Any company match. If your workplace plan offers a company match, consider that potential for additional savings when setting your contribution amount.
- Your savings. We believe that most people should save at least 15% of their annual salary (including any employer matching contributions). Doing so can help cover retirement expenses over a period that may last three decades or longer. Depending on your circumstances, increasing your annual contribution rate by several percentage points can make a big difference. (See “The Power of 15%.”)
- The amount you contribute to your tax-advantaged accounts. For 2017, you can contribute a total of $18,0002 to a workplace plan and $5,500 to IRAs. (If you're age 50 or older, you can take advantage of additional catch-up contributions of $6,000 to a workplace account or $1,000 to an IRA.)
- Roth contributions. Having a source of tax-free income in retirement, such as through a Roth IRA or Roth 401(k), if offered by your employer plan, may be a good choice for your retirement savings. When considering Roth accounts, consider your circumstances and whether you expect your tax bracket to decrease significantly in retirement.
- Your asset allocation. Equities generally offer greater long-term potential return than other asset classes, such as fixed income and cash. Your age and tolerance for risk will help you determine the precise amount of equities to hold.
- Any additional sources of income to fund your retirement savings. Examples might include a tax refund, bonus, raise, or financial gifts.
If you’re not able to save 15% of your salary right away, think about boosting your contributions gradually: You could target a two-percentage-point increase each year until you reach the 15% mark. Automating these increases can help you stick to your plan.
Contributing a few percentage points more a year could make a significant difference in your retirement savings.
All figures assume 7% annualized returns (based on a blend of historic rates of return for stocks, bonds, and short-term investments), a $50,000 starting salary at age 30, and a 3% annual salary increase. The savings estimates are rounded and shown in future dollars. This example is for illustrative purposes only and does not represent performance of any particular security. Investment returns will vary and may be higher or lower than in this example. These assumptions do not account for plan or IRS limits, may not match your situation or market conditions, and may differ from other saving target estimates. If you use this chart, please be sure to take all your assets, income, and investments into consideration. All investments involve risk, including possible loss of principal.
If you’re on track: Continue to prioritize retirement savings
It takes commitment and discipline to get your retirement savings on track and to keep them there. Strive to maintain your momentum by continuing to make retirement savings a financial priority and adhering to the steps outlined earlier.
To build on your current savings strategy, consider:
- Opening a taxable account to save additional assets if you're already saving the maximum allowed in your tax-advantaged accounts.
- Rebalancing your investments regularly to maintain your desired asset allocation and diversification.
- Helping your children and grandchildren understand the importance of saving early for retirement. (See “Be a Mentor: Help Your Family Get an Early Start.”)
Be a Mentor: Help Your Family Get an Early Start
Talk to your children and grandchildren about the value of an early start to saving for retirement.
Lead by example and share the lessons you’ve learned about the importance of saving for retirement with your children and grandchildren (or nieces and nephews, if you don't have children of your own) to help set them up for success:
Start early. Discuss the benefits of saving as much as possible, as early as possible. Provide examples around the power of compounding, emphasizing how even small contributions and incremental increases can pay off significantly over time. Explain the value of establishing concrete savings goals, such as setting aside 15% of gross income, and using benchmarks to measure progress.
Roth IRAs. The benefits of saving in a Roth account can be even more pronounced for younger investors, since those savings can potentially grow tax-free for decades.
Match their contributions. If your family member has access to a 401(k), explain the benefits of contributing at least enough to the employer savings plan to receive any company contributions to which he or she is entitled. Also, consider matching your child’s or grandchild’s IRA contribution, if you have flexibility in your budget and can do so without compromising your own retirement plans. The recipient must have earned income equal to or greater than the total contribution. That contribution cannot exceed the maximum limit of $5,500 in 2017.
Your situation is unique, as is your vision for retirement. The T. Rowe Price retirement savings benchmarks can help you measure progress against our savings targets. If you find there's a gap between what you have and our benchmarks, there are immediate and concrete steps you can take. The earlier you start implementing these changes, the more you can maximize your growth potential. Taking a few minutes now to measure your progress could alter the outcome of your financial future and help you achieve your long-term goals.
1Social Security Administration Life Expectancy Calculator. Results are based on a female born January 1, 1970, retiring at age 67 in 2037. Actual number is 88.1.
2Subject to employer plan contribution limits.