Are You on Track for a Successful Retirement?January 30, 2018
- 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: Individuals have saved (from age 25 to a retirement age of 65) 15% of their annual salary (increased by 3% each year) in a tax-deferred retirement account with a preretirement portfolio consisting of 60% stocks/30% bonds/10% short-term bonds, changing to 40% stocks/40% bonds/20% short-term bonds during retirement. Gross retirement income through age 95 is estimated to equal 75% of preretirement salary, consists of annual retirement account withdrawals of 4% plus estimated Social Security benefits (both beginning at age 65), and is increased by 3% annually for inflation. The savings benchmark analysis is based on results from our Retirement Income Calculator, which considers 1,000 market simulations and an 80% simulation success rate, using hypothetical age 65 salaries of $70,000, $100,000, and $110,000. That tool’s methodology and assumptions are explained in detail at troweprice.com/ric. Users should consider their own circumstances. Results may not apply to earnings that vary substantially from modeled salaries.
If you’re off track: Don’t panic
When comparing your total retirement savings with 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 “Value of Contributing More.”)
- The amount you contribute to your tax-advantaged accounts. For 2018, you can contribute a total of $18,5002 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 if you don't expect your tax bracket to decrease in retirement or if you already have significant Traditional assets and won't need all of those funds for income.
- 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.
Starting annual salary of $50,000 increased each year at 3%. Annual rate of return is 7%. Contributions not to exceed IRS 2017 limit of $18,000. This example is for illustrative purposes only and is not meant to represent the performance of any specific investment option.
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 of 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 2018.
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.