People are living longer than ever before thanks to rapid medical advances, broad standard of living improvements, and a growing public focus on healthy lifestyles. Although all of that is great news, it could also wind up creating a situation where many Americans have to fund retirements that are longer in duration than the number of years they spent in the workforce. What is worse is that many people are not sure at all about how much money will need to be set aside in order from them to ensure a comfortable and financially secure lifestyle in old age.
For example, a report from Charles Schwab found that only 58 percent of surveyed U.S. adults believe that they understand how much money they will need to save in order to achieve their desired retirement lifestyle, and a poll conducted by PlanVision found that 58 percent (coincidence) of respondents do not know if they are currently on the right track for a comfortable retirement.
How Much Should I Save?
So exactly how much money should a person try to save before retiring? Many financial professionals recommend having enough money set aside so that around 80 percent of your annual income can be replaced, at least during the first few years of retirement. The idea is that since people typically do not spend 100 percent of their wages each year, an 80 percent replacement rate should be adequate to allow most of them to maintain the lifestyle they enjoyed prior to retirement. Another commonly used rule of thumb is to recommend that people have at least 8 times their ending salary saved away before retiring. However, a study by Aon Hewitt analyzed the financial conditions of over 2 million working Americans and estimated that they would need to have at least 11 times their final pay saved away if they want to stop working at the traditional age of 65 and be able to maintain their preretirement standard of living.
Strategies for Saving
Add to this uncertainty the challenges of eroding Social Security benefits and rising healthcare costs and it becomes quite clear that people need to start saving for retirement as soon as possible. Further, Americans must make the most of every tax-advantaged saving vehicle available, e.g. contributing at a minimum enough to a 401(k) plan so as to maximize the employer-provided match. Earlier research from Fidelity has shown that putting just an additional 1 percent of your salary into such a plan each year can provide a significant boost to the amount of income available during retirement, especially if this increase is made early on in your working career. Another recommendation from Fidelity is to regularly meet with your financial advisor to review your investment portfolio’s asset mix. This is useful because the far too common “set it and forget it” approach to investing can often leave people with either a too conservative or too aggressive portfolio composition relative to their nearness to retirement.
Leverage an Advisor
Similarly, a study from John Hancock found that seven in ten surveyed U.S. adults who work with a financial advisor said that they are “on track or ahead” in saving for retirement, while only a third of respondents who do not work with an advisor reported the same level of preparedness. Individuals who consult with a financial advisor were also found to be more likely to know how much they will need to save for retirement and regularly set money aside toward that goal. Moreover, people who work with a financial advisor were found to have a higher probability of maxing out their 401(k) plan contributions, as well as establishing an emergency savings fund to help them avoid dipping into their retirement assets early in the event on an unexpected financial setback.
Sources: Charles Schwab, PlanVision, Aon Hewitt, Benefits Pro, Fidelity Investments, John HancockPost author: Charles Couch