How Much Should Employees Have Saved Up For Retirement So Far?

I’ve just come off of a three-week road trip, where I zig-zagged across the western half of the U.S., speaking to a variety of workforces on planning for retirement.

One common question I heard again and again from many of the mid-career employees was “how much should I have saved up so far?” towards their retirement nest egg.

Similar to my journey as I traveled from one workplace location to another, I knew what the final destination was on the map, but it was just as important to know how many miles I had driven and how many more miles to go so I would know when I had to stop for gas or take a pit stop.

Most workers are now familiar with the general rule of thumb that they need to save enough while they’re working in order to replace at least 80 percent of their income in retirement. There are lots of great online calculators that project whether an employee is on track for this goal, but what employees wanted from me was just a quick formula they could do in their head to estimate if they had saved enough so far based on their age.

Thanks to a recent Fidelity report issued in September, I was able to share the following milestones that employees could easily calculate:

  • At age 35, workers should have saved at least 1 times their current income;
  • At age 45, workers should have saved at least 3 times their current income;
  • At age 55, workers should have saved at least 5 times their current income;
  • At age 67, a pre-retiree should have saved at least 8 times their current income before retiring.

To determine these benchmarks, Fidelity assumed the employee would make continuous contributions to a workplace plan beginning at 6 percent and escalating 1 percent per year until 12 percent, that they receive a 3 percent employer contribution during their entire career on a salary that increases 1.5 percent over inflation, and earn an average return of 5.5 percent in their portfolio.

However, Aon Hewitt has a higher threshold that employees should reach at retirement, and that is 11 times their final pay, to factor in inflation and post-retirement medical costs. To give your employees a snapshot of where they are towards these two varying targets of 8 to 11 times their income, it is helpful to use the tools your plan provider has available.

Don’t wait for your employees to find these calculators online, instead have the projections run for them or send them the link directly if you have a tool available, such as Financial Engines.

Since it’s open enrollment season, don’t overlook your retirement plan, even though most plans allow participants to make changes throughout the year. Include an evaluation of the employee’s current deferral rate to project if that’s enough to hit these savings guidelines, and then encourage your workforce to increase their 401(k) contributions or sign up for auto-escalation at the same time they are making their annual health insurance decisions. That way they’ll know they’re on track to their retirement destination.


How Much You Should Have Saved For Retirement At Every Age

T oday I’m going to talk about the

Rule of 300. This shortcut helps you envisage how much money you’ll need for retirement or to achieve financial independence.

That’s right! The rule of 300 turns an amorphous future you into a flesh and blood creature with their own wants, needs, and bank statements.

Most of us find it difficult to imagine paying for stuff several decades hence. The Rule of 300 handily bends the space-time continuum.

However let’s get one thing straight.

The Rule of 300 is not a scientific law that can’t be broken. On the contrary it will probably always be off a bit. It’s just a rule of thumb.

The assumptions behind the Rule of 300 are open to debate.

Equally, anyone who thinks they can predict exactly what will be on their bill in 30 years’ time – from the cost of robot insurance to the price of a mini-break to Mars – is delusional.

But as always with investing: What’s the alternative?

All forecasting methods have their downsides. Few compensate for them by being as simple as the Rule of 300.

I will return to the caveats later. Once you know what assumptions you disagree with, you can replace them with your own guesswork.

Let’s first outline the rule as it stands.

The Rule of 300 is dead simple. To use it you need two numbers, and one of those is 300.

Take your monthly expenditure. Multiply it by 300. The result is how much you’ll need to have saved to keep living like you do today after you jack in your job.

Let’s say you currently spend £2,000 a month.

£2,000 x 300 = £600,000

The Rule of 300 says you’ll need £600,000 to quit work and still pay your bills.

(Or to tell The Man to go hang. Or to safely smirk in meetings. Or to swap your job to do something less boring for money instead. Or to keep loving your job with a safety buffer. You decide!)

Be sure to multiply 300 by your monthly expenditure today. Not by your monthly salary, or a guess at what things will cost in 20 years, or by two-thirds of your income or anything else.

Simply put in your expenditure as it stands, and the Rule of 300 tells you what you’ll need to have saved to keep spending like that from your capital.

Do not include any regular ISA or pension payments. For the purposes of this calculation we’re assuming you stop saving and start spending.

The Rule of 300 is the easiest maths you’ll ever do in personal finance. But to save you even more bother, here’s a table that shows how much you’ll need saved according to the Rule of 300, based on various monthly expenditures.

Source: Author’s calculations.

Depending on your circumstances and penchant for caviar, those numbers may seem dauntingly high or encouragingly achievable.

Are you in the “HOW MUCH?” camp? Then Rule of 300 could be extra useful. It can help you envisage what your various monthly spending habits will cost you in capital terms.

Let’s say you spend £6 a month on Amazon’s music streaming service. Multiply that by £300, and voila – you can see you need £1,800 to keep the music playing indefinitely.

However you may have other more questionable commitments:

Source: Author’s research (and bills)

I’m not judging. If your idea of retirement bliss is playing golf as often as possible, then something has gone wrong if you don’t plan on paying for club membership.

The point is that by looking through the lens of the Rule of 300, you might be motivated to cut the things you don’t care about so much.

This way you can reduce how much you need to save for financial freedom.

The maths behind the Rule of 300 is based on a

The SWR is said to be the money you can theoretically spend every year from your portfolio without (too much) risk of running out before you die.

Here’s how the Rule of 300 works: Let’s say your monthly expenditure is £2,000. Over a year that’s 12 x £2,000=£24,000. To find the capital required to fund that with a SWR of 4% we must solve (4% of Capital = £24,000) which is equivalent to (Capital = £24,000/(4/100)) which works out at £600,000. Alternatively, the Rule of 300 says multiply £2,000 x 300=£600,000. Ta-dah! Same!

To say the safe withdrawal rate is controversial is an understatement. It’s the personal finance equivalent of the Kennedy assassination. Different people take it to mean different things, which may even be contrary to the original research.

Some are dubious because it’s based on US investment returns, which have been strong compared to the global average. They say 4% is too high.

Others add that today’s low interest rates mean return expectations (and hence the SWR) must be lowered, too.

Yet others believe that’s too pessimistic. Yields should rise eventually, and anyway the 4% rule was stingy when markets did well so there was arguably a buffer in there.

Newer thinkers even claim the SWR strategy can be improved by assuming variable withdrawals as conditions fluctuate.

Finally, old active investing luddites like me presume we’ll never touch our capital, but rather live off our income. We often coincidentally target the same income yield of around 4%, even though the key SWR research was based on potentially spending everything.

I’m not proposing to solve the SWR debate today. Just know that you can tweak the Rule of 300 to suit your own beliefs by reworking the maths above.

  • Want to target 5% a year as your withdrawal rate? You can use a ‘Rule of 240’ to estimate how big your pot must be.
  • Think 3% is more like it? For you it’s the ‘Rule of 400’.

Personally though, I’d stick to the Rule of 300.

You’ll read all kinds of authoritative sounding comments about what is the best number to use for either the SWR or as a multiplier.

Reflect on them but understand nobody knows because we don’t know how your investments will pan out, how long you’ll live, and nor how much money will really be required in the future for a decent standard of living.

And it is only a rule of thumb. Keep it simple, Sherlock.

Despite my rather analytical education, I’m not one for precise modelling in anything other than the underwear department.

Unlike my co-blogger I don’t track my expenses or stick to a budget. I prefer to keep a rough idea of cash flows in my head.

I’m also not one for working out the exact amount of capital to target for some potential retirement in 23 years and three months’ time.

I’ll sometimes look at what’s needed to replace my current income, but only as a ready reckoner. (That method targets pre-tax salary, unlike the Rule of 300’s after-tax spending. Both have their uses.)

Good for you if you prefer precision – I’ve nothing against it. We can all learn from each other.

But even if that’s you, the Rule of 300 takes zero effort to apply in your everyday thinking. You may have a 20,000-cell spreadsheet back home in the lab, but the Rule of 300 can still be a useful shortcut in conversation.

Of course most people out there don’t even have a financial plan on the back of a napkin. They haven’t the foggiest what they’ll need to have saved when they no longer receive a regular pay cheque.

Many are deluded. Some think they’ll enjoy round-the-world cruises on the back of saving £50 a month today. Others believe they’ll need so much money that stopping working is an unrealistic fantasy.

Does that sound like you, or someone you know? The Rule of 300 can be a good start in getting a grip on things.

No, it is not a scientific law. But in terms of revolutionizing how you think about your financial needs, the Rule of 300 could be as significant for you as that apple that fell on Sir Isaac Newton’s head was for him.

Thanks for reading! Monevator is a simply spiffing blog about making, saving, and investing money. Please do check out some of the best articles or follow our posts via Facebook, Twitter, email or RSS.

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How Much Should I Have Saved For Retirement At My Age?

The amount of money you should have saved for retirement is surprisingly easy to answer. Let’s run the numbers.

Writes about personal finance, early retirement, and anything else that has to do with money

How much should i save for retirement by 45

How much should i save for retirement by 45

How much should i save for retirement by 45

How much should i save for retirement by 45

I was horrified by what a 50-year-old relative told me recently:

I have $25,000 saved up for retirement!

The bragging tone of his voice told me that he thought this was an accomplishment. I almost said this:

Repeat after me now: “Welcome to Wal-Mart!”

I thought better of the situation and kept my mouth shut. However, the exchange made me think about this question:

How much should I have saved for retirement?

The answer is easier than you may think.

The first question you need to ask yourself is this:

How much do I spend every year?

If you’re old-school, record all purchases in a notebook and add them up at the end of every month. If you like fancy websites and automation, use a site like Mint or Personal Capital. Both are free, wonderful tools.

Don’t forget to include a buffer. Add 10% for future maladies. You never know when your home will need a new furnace or you’ll have an unplanned medical expense.

Now that you know how much you spend every year, let’s talk about your magical retirement number.

The next question to ask yourself if you want to retire is this:

How much should I have in savings?

Luckily, there’s a simple guideline for this and it’s called the 4% Rule. The rule came from a study by William Bengen. =

Bengen wanted to know what the maximum safe withdrawal rate was as a percentage of portfolio value. The study found that you can withdraw 4% of your portfolio the first year of retirement. In subsequent years, the number increases for inflation.

For example, if you have $1,000,000 saved, you may safely spend $40,000 in your first year of retirement. Another way to look at it is that you need to save 25x your annual spending for your first year of retirement.

The 4% Rule is controversial. Some think it’s too risky. Common complaints include:

  • The rule was only meant to last 30 years.
  • The rule is based on historical data and markets won’t perform like they have in the past.
  • Markets are more volatile.

All of those arguments have some degree of merit. However, don’t forget that the 4% Rule was designed to be very conservative. Data shows that in many years, retirees could have actually spent much more than 4% and been fine.

Here is what the highly respected financial planner, Michael Kitces, had to say about it:

“…by applying the 4% rule, over 2/3rds of the time the retiree finishes with more than double their wealth at the beginning of retirement, on top of a lifetime of (4% rule) spending! Half the time, wealth is nearly tripled by the end retirement, as retirees fail to spend their upside!”

I could discuss the 4% Rule and safe withdrawal rates all day, but I’ll save that for another post. If you have any doubts about making your money last, just be careful in the first 10 years of retirement when it matters most.

If markets get a little tipsy, embrace the “gig” economy and work for 8 hours a week to buffer your nest egg.

And finally, we arrive at the big question:

How much should I have saved for retirement at my age?

Wait, stay with me. I’m not trying to dodge the question.

Let’s work backwards by defining The Big Goal first. I’m talking about the age that you should aim to retire at. You probably have a number already, you’ve probably compared yourself to some chart of the average retirement savings by age, but forget it. I’m going to tell you what you should do instead.

Ready? Read carefully and note that I’m putting the goal in big, bold letters for extra emphasis. Your goal should be this:

Save enough money so that you can retire no later than age 50.

50? What. 50!? You’re out of your mind! This must be a typo.

Nope, no typ0. 50 is the magic number. Or earlier.

But I love my job! I want to work at ABC Widgets forever!

That’s awesome! Having a job that you love is an incredible gift. However, circumstances change:

  • Will ABC Widgets always be viable? ***cough cough*** Enron! ***cough*** MCI WorldCom!!
  • Will XYZ Widgets take over ABC Widgets and relocate your job to South America?
  • Will you discover a new passion, but not be able to pursue it for lack of financial means?

And most important:

  • Do you really want to spend 2,000 hours in a cube farm every year for the next 40 years? 80,000 hours in a fabric lined cube? (Remember that insane people get put in padded rooms.) I don’t think that you really want this. No sane person would.

And I never said that you have to quit. If you really do love the soft walls of your cube and the gossip sessions with co-workers, you’re free to stay at ABC Widgets until you’re 75.

Maybe you’ll be like Warren Buffett and work into your 80s. I’m just stating that you should work towards having the freedom to leave whenever you choose. Working because you want to, not for the paycheck, changes everything for the better.

So, how much should you have in savings to retire at 50? It’s easy to figure out:

Remember when I asked you to calculate your yearly spending? After that, I told you about the 4% Rule. Now, you just need to do this:

Yearly spending x 25 = Money needed to retire

Let’s assume that you spend $40,000 per year and therefore, need $1,000,000 to quit. For our little exercise, I’ll also make these assumptions:

  • Over the course of your investing life, the stock market returns 8%. This is below the historical average of close to 10%.
  • Based on 8%, according to the Rule of 72, it takes 9 years for your money to double.
  • You’ll start saving at age 24 with $0. You have 26 years to save.

Here are your magic numbers:

You’re probably not 24 and hopefully you have more than $0 saved up, so the question becomes this:

How much do I need to save to escape the Cube Prison?

Your own number is easy to figure out. Head over to this investment calculator and start punching in numbers:

  • Enter your starting balance: Enter your current savings.
  • What is the annual rate of return: I’m conservative, so I went with 8%.
  • How much to you plan to contribute monthly: Type in your current monthly contribution.
  • How many years do you plan to contribute: 50 – your current age.
  • How much will the investment be worth in…: 50 – your current age.

Click Show Results. Does the Value show your retirement number? If so, wonderful! If not, it’s time to bump up your monthly contributions.

Let’s look at one more example. Saver Samantha is 40 and has accumulated $400,000. She spends $40,000 per year, so needs $1,000,000 to retire. At her current savings rate, she’s going to make it and then some:

Nice work Samantha!

If you want to track your magic number automatically as you work towards it, you can sign up for Personal Capital’s free retirement planner here.

Are you intimidated? Don’t be. In my examples, the savers achieved their goals by saving $1,000 per month. At that amount, you’re not even close to maxing out your 401(k). With an employer match and potential spousal income, I know you can do it.

And investing doesn’t have to be complicated. Salesmen on Wall Street pedaling overpriced, sub par investment products want you to think so, but services like Betterment allow you to easily and efficiently invest in low-fee index funds.

Retiring at 50 may sound like a lofty goal, but it can be done. Work hard and save even harder. You have a lot of living to do and the best life isn’t wasted in a cube. Would you rather have this:

Working life: Alarm clock. Traffic. Boss. Cube. Deadlines. Coworker with body odor. Stress.

Financially independent life: Explore. Teach. Read. Nap. Learn. Exercise. Volunteer. Get outside. Learn. Work on your dreams. Grow. Live with passion and enthusiasm.

The cube isn’t looking so great now, is it?


How Much You Should Have Saved For Retirement At Every Age

How are your retirement plans coming along? | iStock.com

There’s a knowledge gap surrounding all things retirement. If it were easily comprehensible, Americans wouldn’t devote so much time and stress learning how to properly prepare for it. Many are unaware of what it truly takes to save for retirement or how to get started in the first place. The jargon around retirement can make us fall back into a retreat in search for our blissful, yet ignorant cocoons. What truly constitutes a diverse investment portfolio, and how many years do we need to account for?

Fidelity Investments attempted to answer those very questions. It conducted a Retirement IQ Survey to test America’s general knowledge of the topic. And it’s no surprise many Americans missed the mark. In fact, some were shooting on an entirely different range.

Retirement might seem like a distant pipe dream, entirely out of reach for your generation of workers. But your dream can become reality if you start planning today. Let’s test your retirement IQ and see how prepared you are for your future.

Let’s take a quick look at answers to Fidelity’s eight questions that will help shape your retirement planning. We’ve also included some retirement tips at the end.

1. Roughly how much do investment professionals estimate people save by the time they retire?

Most people severely underestimated how much they’d need to save. | iStock.com

What the survey said: 74% of respondents underestimated how much they would need to retire and maintain their standard of living. What’s worse is 25% — 19% of those ages 55 to 65 — thought only two to three times of their most recent annual income would be sufficient for retirement.

The correct response: Fidelity estimates we should be saving “at least 10 times the amount of one’s last full year’s income.” For example, if your salary at age 35 is $65,000 annually, you should have about $650,000 in retirement savings before you start making plans for a life in the Florida Keys. If this number worries you, consider saving at least one to three times your income now, and gradually increase that amount as you get older. Think of it as giving your future self a hefty raise every few years. A better measure may also be to save 25 times your estimated annual expenses in retirement.

2. How often over the past 35 years do you think the market has had a positive annual return?

Investing in stocks can help pad your retirement. | Pixabay

What the survey said: The market has seen a positive uptick 30 out of the past 35 years, but it seems no one would know it. A negative outlook on Wall Street might have influenced answers because only 8% of overall respondents and 14% of 55- to 65-year-olds answered correctly.

The correct response: The S&P 500 index shows an average return of about 10%. But when we consider inflation, that gain is about 7%. It’s clear investing in the stock market could yield significant returns down the line.

3. If you were able to set aside $50 each month for retirement, how much could that end up becoming 25 years from now, including interest if it grew at the historical stock market average?

Saving a little can go a long way in retirement. | Fox Photos/Getty Images

What the survey said: If question No. 2 stumped you, then you were doomed from the start with No. 3. About 47% of applicants underestimated the value of small savings over time. And 27% of respondents estimated a stock investment return at zero and calculated a savings of $15,000 — a much lower number than is true.

The correct response: If we consider the average market return of 7% on $50 a month, compounded monthly interest would significantly increase that amount to roughly $40,000, not $15,000. Saving early, even just 1% of annual income, can make a big difference. For example, a millennial who saves 1% of a $40,000 annual income could see an increase of $1,930 every year for 12 years.

4. Given the current average life expectancy, if you want to retire at age 65, about how long would you need your retirement savings to last?

The key to making your savings last is to start saving early. | ABC

What the survey said: Participants’ knowledge about how to prepare for retirement was equally dismal to their knowledge about retirement savings. About 38% of Americans are hoping for a ride on the gravy train and believe their savings should last only 12 to 17 years. That number is actually much higher.

The correct answer: The average life expectancy is 85 for men and 87 for women. Therefore, most would need to stretch their savings for at least 22 years — unless you’re OK with running out of cash during your golden years. But people are living longer these days. When considering the younger generations, it’s recommended they save for at least 30 years of retirement.

5. Approximately how much did the average monthly Social Security benefit pay in 2016?

Half of survey participants did not know how much social security they’d receive monthly. | iStock.com/kazoka30

What the survey said: When it comes to social security, the respondents got serious. About 43% overall answered this correctly, and half of the 55 to 65 age group got it right. The other 50% who got it wrong should keep reading.

The correct answer: The average monthly social security benefit is $1,300, but there are many factors that influence this number. You’ll receive the highest monthly payout if you wait until your full retirement age to withdraw. Fidelity says those who wait will increase their monthly Social Security income by 30%.

6. About what percentage of your savings do many financial experts suggest you withdraw annually in retirement?

Learn to live conservatively during retirement. | iStock.com

What the survey said: Those ages 55 and older are chomping at the bit to withdraw large annual amounts of 7% or more. Furthermore, 15% of that age group thought a 10% to 12% withdraw would be financially doable. Spoiler alert: It’s not. Withdrawing such a high percentage could drain your savings in less than a decade.

The correct answer: Fidelity recommends a sustainable withdraw rate is 4% to 5% of your initial assets. For example, if you have $650,000 in retirement accounts, then a 4% annual withdraw would equate to about $26,000. After adjusting that rate for yearly inflation, you’d have more than enough savings to last you through 22 years of living expenses.

7. What do you think is the single biggest expense for most people in retirement?

Housing, transportation, and medical bills will be your biggest expenses. | Tybee Vacation Rentals

What the survey said: Let us guess: You answered health care as the biggest retirement expense. If so, you and 69% percent of Fidelity’s survey participants got it wrong. However, it is worth acknowledging, at least. Due to recent cost increases, health care has become the most unpredictable expense to plan for. It was also the No. 1 item respondents were most worried about being able to afford throughout retirement.

The correct answer: Housing, health care, and transportation are typically the largest expenses in retirement. But when it comes to total cost, housing takes the cake. The Bureau of Labor Statistics estimates housing will eat almost 50% of savings for households with a spouse 62 years and older. Medical costs come in at roughly 12% of total retirement expenses.

8. About how much will a couple retiring at age 65 spend on out-of-pocket costs for health care over the course of retirement?

Do you have enough money for retirement? | iStock.com/c-George

What the survey said: Speaking of health care, the survey shows yet another case of wishful thinking. Seventy-two percent of respondents underestimated out-of-pocket costs in general, and 22% of respondents underestimated their amounts by a whopping $200,000. Only 15% of respondents were correct in their estimations.

The correct answer: The average 65-year-old couple retiring in 2016 should expect to pay about $260,000 in out-of-pocket health-related costs throughout retirement. When calculating this number, the Fidelity estimate assumes the couple does not have employer-provided retiree health care coverage but does qualify for the federal government’s insurance program.

Looking at these numbers is like sticker shock at the department store. But knowledge is power. So spend a few hours here and there learning about your needs and how to increase your wealth over time. The more you talk about it, the less scary it’ll seem. It’s hard to know where you stand on the retirement spectrum because every person has a unique vision and varying circumstances to account for.

Although boosting your retirement IQ is an excellent first step, Ken Hevert, senior vice president of Retirement at Fidelity, says, “The majority of investors need to have a diversified portfolio that includes equities to enable growth over time. If you’re not investing, you’re likely losing money due to inflation.”

First and foremost, start early. Time is on your side. A little goes a long way when it comes to savings over time, so match your employer contributions when you can. As you move up a few rungs on the career ladder, consider increasing your automatic contributions gradually. Compounding interest will become your closest confidant, as even the tiniest increases will grow exponentially by the time you hit your golden years.

Also, now that you know housing will be your biggest retirement expense, consider downsizing or relocating to another state that could significantly lower your cost of living. Your retirement destination could very likely hurt you down the line.

Finally, get in a conservation mindset, and learn to live on a budget. This survey shows us some new retirees make the mistake of withdrawing too fast or too much. Fidelity suggests breaking down your expenses into two categories: guaranteed income sources and portfolio withdraws. Then, use your guaranteed income, such as social security, pensions, and annuities, to cover essential costs, and use portfolio withdraws to cover extracurricular or unplanned life expenses.


Ask the Readers: How Much Should You Save for Retirement?

How much should you save for retirement? Carla dropped me a line because she’s puzzled where the standard “save 10% of your income for retirement” advice originated. She’s afraid that ten percent isn’t nearly enough. Carla writes:

The financial experts always say to save 10% for retirement (for example, in your review of The 1-2-3 Money Plan). Buy why 10%? It doesn’t make sense to me.

I’m 25. If I retire at the normal age of 65, that will give me about 40 years of full-time wage earning. Let’s say I plan to die at 85. That’s 20 years of retirement. I’m assuming that I’ll be fully funding my own retirement (not counting on any sort of pension or social security).

How on earth would saving 10% for 40 years cover your expenses for 20 years? I know that expenses should be a bit lower in retirement, and I know that the money will make some gains due to being invested, but really? How the heck could that ever add up?

The short answer to Carla’s question is that, in general, if you start saving early, and if you invest aggressively, 10% can often be enough. But there are a lot of things that could go wrong, too. The stock market could drop nearly 40% in the year you choose to retire (as it did in 2008). You might suffer a catastrophic illness. The country might experience hyperinflation.

Each of these things are unlikely, but they are possibilities. Because of this, many people save more than the 10% commonly recommended by experts.

I think that the experts urge 10% because it’s a target people can understand, one that doesn’t seem too intimidating. It’s a convenient financial rule of thumb. My own opinion — and I’m sure the experts would agree — is that you should save as much as possible for retirement. Columnist Liz Weston has a great suggestion:

Save 10% for basics, 15% for comfort, 20% to escape. This rule of thumb works pretty well if you start to save for retirement by your early 30s. Saving at least 10% of your income ensures you won’t be eating pet food. Fifteen percent should get you a more comfortable living, while 20% gives you a shot at an early retirement (and yes, you get to count employer contributions as part of your percentage). Wait just a decade to start, though, and you’ll need 15% for basics and 20% for comfort; an early retirement may not be in the cards.

Tonight I asked my wife how much she’s setting aside for retirement. Her salary is nearly $60,000 a year. She’s setting aside $18,000 herself, and her employer is contributing $3,600. In other words, Kris is saving nearly a third of her gross income. But Kris hasn’t always saved this much. She didn’t save much at first, but has increased the amount she saves as her income has increased.

When you’re 25 like Carla, you’re probably near the low point of your earning potential. This is a huge reason that I’m advocate of banking your raises into savings accounts. In general, people earn more as they get older. Don’t use salary increases to fund lifestyle inflation, but instead use that money to save. It may take a few years, but eventually you can set aside 25% or more, just like my wife.

The power of compounding

Even if you set aside 25% of your income, though, how can that possibly be enough to cover your needs during retirement? If you’re worried about how much your investments can actually earn over time, take a look at two past articles:

Briefly, compounding can (and does) supply huge returns. These returns are magnified the longer your money generates the returns. That is, $1000 invested at 10% for twenty years doesn’t just earn double the amount you would earn if the money were invested for ten years.

Playing with this compound interest calculator, the first scenario generates $2593.74 while the second produces $6727.50. (And leaving the money there for 40 years would produce $45,259.26!) There’s a reason financial advisers urge people to begin investing early. Returns are magnified with time.

Are 10% returns realistic? Perhaps. Although even the best CD rates aren’t returning rates that high now, as the article above demonstrates, the average long-term return on U.S. stocks is roughly 10%. This is what stocks have returned in the past.

Having said that, there are some important things to remember.

First, as mutual fund advertisements are eager to tell you, “Past returns are no guarantee of future results”. Just because the stock market has returned about 10% in the past doesn’t mean it will do so in the future. (Warren Buffett has said that he expects stocks to offer much more modest returns over the next century.)

Second, average is not normal. Yes, it’s true that the U.S. stock market has an average annual return of about 10%. But that doesn’t mean that it returns 10% every year. Some years — like 2008 — the market drops by 39%. Some years — like 2009 — the market grows by 18%.

Here are a few keys to obtaining steady returns from your investments.

  • Have a plan. Develop an investment plan built around your age, your goals, and your circumstances. Ask yourself how much risk you’re willing to take. Some people are willing to take on greater risk in order to have a chance at higher rewards. Whatever the case, take the time to draft a plan that makes sense. Refer to this plan whenever things become confusing. Reminding yourself of your plan can keep you from overreacting — in good times and in bad.

  • Don’t be an emotional investor. I’ve heard from a lot of people who invested near the top of the stock market in 2007 — and then sold last winter. This is buying high and selling low. It’s a sure way to lose your shirt. When the market tanks, don’t panic. When it’s riding high, don’t get caught up in the euphoria. Have a plan. Keep making your contributions. Thing long term and ignore the short-term noise — no matter how loud the noise might be.

  • Don’t raid your retirement. It can be very tempting to raid your retirement account to buy a new home or to take a trip to Europe — or even to put food on the table when you’re out of work. This is usually a bad idea. When you tap into retirement early, you’re subject to taxes and penalties — and you’re robbing from your future self. You’re robbing not just the money you take, but also the returns it might have generated over the years.

  • Make regular contributions. Get in the habit of saving for retirement by investing regularly. Make it automatic, if you can. The best way to do this is to enroll in an employer-sponsored program and have the money taken from your paycheck. This way the process is invisible to you. Regular contributions to a retirement plan allow you to take advantage of dollar-cost averaging.

  • Take advantage of free money. If you have access to an employer-sponsored retirement plan, use it. When your employer matches your retirement contributions, it’s like getting free money. There are few better deals in the financial world. (Are there any better deals?)
  • Each of these actions can help you obtain better long-term results from your retirement savings. But the real key is to start now. The sooner you begin, the more time you have to accomplish your goals.

    How much should you save?

    Retirement planning is a complicated subject, and I’ve only scratched the surface here. There are a lot of variables I haven’t covered (taxes, inflation, etc.). Carla is way ahead of the game by asking these questions now.

    So, how much of your income do you save for retirement? Do you save 10% like Carla? Do you save 25% like my wife? How have you arrived at this amount? Do you plan to save more in the future? I’m especially interested to hear from those who are in or near retirement. Do you wish you had saved more when you were younger? What would you do differently? What advice can you offer folks like Carla who are just starting out?

    GRS is committed to helping our readers save and achieve their financial goals. Savings interest rates may be low, but that is all the more reason to shop for the best rate. Find the highest savings interest rates and CD rates from Synchrony Bank, Ally Bank, and more.