How much are employees targeting to save for their retirement? There is no lack of suggested targets for the amount Americans need to retire — as we can see below — but what is the right amount for employees and clients to save, taking into account their unique circumstances?
Start by finding the target from the recommendations below and then make any necessary adjustments based upon the suggestions that follow. Check out the Guidance section towards the end of this column to make sure they are on track.
Retirement savings targets
When it comes to establishing a goal amount for retirement, there is no end of experts who have different targets. Here’s what a few suggest:
· 60% of pre-tax income -
· 70% of pre-tax income -
· 75% to 85% of pre-tax income -
· $1 million to $1.5 million -
· 8 times final pay at age 70 –
· 10 times final pay at age 67 –
· 10 to 12 times current income –
Suggested adjustments Along with targets, employees and their financial advisers also need to make adjustments to their retirement goals based on real-life factors. These factors include:
Expected lifestyle: If employees are looking forward to an active retirement — traveling, completing their bucket list, or in general doing all of the things they have been putting off while they have been busy working — they will need to adjust their savings target higher. For example, that rule of thumb suggesting targeting 70% of pre-tax income should be closer to 90%. Or even higher.
Very few of the individuals I talk with who are close to retirement believe they will need less money than they are earning now when they retire. Most are much more comfortable targeting a replacement ratio of 100% of their final annual earnings. Their feeling is that if they fall short, they still will have enough money to do what they want.
Remember, what is the worst outcome they can experience by saving too much for retirement? Right, they will have more money to burn through during their retirement days. On the other hand, what is the worst outcome that can result from not saving enough? Living with a son or daughter is not appealing to most of us.
Health: This is a big one. Most of us expect to be healthy when we retire, but many of us don't end up that way. If they or their spouse has a chronic health condition that will need to be managed for the rest of their lives, adjust their savings target higher.
If a person is significantly overweight, doesn't exercise, smoke or practice unhealthy lifestyle habits, they should adjust their target higher. Unfortunately, they are on track to experience any of a number of bad (and costly) health outcomes as they age.
Longevity: Does long life run in their family? Have their parents and grandparents lived well into their 80s or 90s? If so, it’s likely that they can expect a similar long life. They should adjust their savings goal higher.
Lack of family: They may not have married or had children, or maybe they moved away from their family or lost touch. Their life expectancy also may be significantly longer than their spouse's. If it is likely that they will spend a lot of time alone in their retirement days, targeting a higher balance is probably wise. They will need to hire people to help them as they age.
Potential long-term care: If a person can expect to enjoy a long life and especially if they don't have family members close, their need for long-term care might be higher than average. Even if they don't need nursing home care, they may incur assisted living or in-home care expenses. If this is a concern, adjust their savings target higher.
Unexpected retirement date: Most of us don't retire when we expect to. In fact, the majority of us end up retiring
For example, people may lose their job because their employer moves, runs into financial difficulties or gets bought. While searching for another job employees may find that the employment opportunities available to them are a lot less appealing due to their age. And, of course, they or their spouse may experience significant health problems that may make it impossible to continue working.
Kentucky, Louisiana and New Jersey are among some of the least-appealing places for employees to spend their post-work years, thanks to low scores in affordability, health-related factors and overall quality of life.
Very few of the individuals I talk with retire at a time of their choosing. Yes, of course they choose to retire, but circumstances beyond their control are driving their decisions. Given that it is likely that they will retire sooner than they think, they should probably raise their savings target.
Guidance Add 12% to 15% each year: To make sure they get on the right track during their working years, add at least 12% to 15% of their gross earnings to their 401(k) plan account each year. This holds true regardless of which target they choose.
Many experts, including
Be sure to max out HSAs first: If they have access to a
Prioritize HSA contributions ahead of what they plan to contribute to their 401(k) plan. If they need to contribute less to their 401(k) plan in order to max out their HSA contributions, do it.
Work with a fiduciary investment adviser: Studies have shown that working with an investment adviser makes it much more likely that they will achieve their savings and investment goals. If they don't work with an adviser now, consider doing so. It has been estimated that working with an adviser can
How are we doing when preparing for retirement? Not so good.
But it's not too late. Employees and clients must review their retirement savings plan today and make any necessary adjustments as soon as possible.
