A challenge that many corporate executives and small business owners face is to understand their current financial situation – particularly as it relates to their ability to someday retire. Questions always linger about how much you will need to save by retirement age and whether you have saved enough money to date given your current age. Below is a chart that shows the savings you should have accumulated by each 5 year age increment to be on track to replace 60% of your family’s current (or desired final) salary at retirement.
In this table, we made the following assumptions: you save 10% of your salary, your salary increases annually by 3%, your investment return is 6% annually, at retirement (age 65) you want to spend 60% of your final salary, and you plan to withdraw 4% from your portfolio annually. We also assumed Social Security will make up 20-40% of your final salary.
The easiest way to understand this table is to look at some scenarios. The first scenario is a 40-year-old couple earning $100,000. If you look at the table, the couple should currently have saved about $561,000 and if they continue to save 10% of their salary each year they will be on track to retire at age 65 and replace 60% of their final salary ($100,000 increased by 3% each year).
A second scenario is a 50-year-old couple earning $200,000 today. The table shows that they should have saved $1,717,000 by age 50.
Another way to interpret the table is for a couple earning $100,000 at age 65 (retirement age). To successfully retire today, they should have accumulated $1,500,000. This will allow them to withdraw 4% or $60,000 from their portfolio each year. They will also be able to increase their $60,000 withdrawal by 3% each year and it should last 30 years if they have a well-balanced, diversified investment portfolio.
If looking at this table, you realized that you are behind in your savings, do not panic. You can make up the gap by saving more money in later years. As you get older and closer to retirement, your salary tends to increase but some of your expenses stay the same (i.e. your mortgage). Let’s say you are only saving 7% of your $150,000 salary and you are behind on your overall retirement savings. If your salary increases each year by 3%, you can put all of your salary increase into savings. For example let’s say you are saving $10,500 (7% of salary) and you get a 3% salary increase - that would amount to an additional $4,500 in the first year. If you direct all of the salary increase to savings, you would be saving a total of $15,000 or about 9.7% of salary. If you get another 3% salary increase the following year, that would amount to an additional $4,635. If you directed that to savings, you would now be saving $19,635 or about 12.3% of your $159,135 salary. If you con tinue to repeat this process the next year, you would be saving 14.9% of salary and would most likely be back on track for retirement. In this scenario, you would have increased your savings from 7% of salary to almost 15% of salary in 3 years just by putting all salary increases into savings.
This table is meant to provide you with savings guidelines and help you better understand the level of savings you should have amassed by a certain age, given your current salary. It certainly is not the be all, end all in terms of retirement planning. In addition to accumulating the correct amount of savings for retirement, there are other parts of your financial life that should not be overlooked. Your estate plan should always be up to date and you should have the proper insurance policies to replace lost earnings and savings power. You always want to have a professional prepare your taxes and finally you should seek the advice of a financial professional to make sure your portfolio is diversified and you are not missing out on any additional savings opportunities.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail email@example.com.
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