Planning for retirement is crucial to ensure financial security and peace of mind in your later years. As of 2024, the average retirement savings for American households aged 55-64 is approximately $400,000. However, this average can be skewed by high-net-worth individuals; the median savings is often significantly lower. In Canada, the average retirement savings for individuals aged 55-64 is around $400,000, similar to the U.S. However, many Canadians have less saved, particularly those with lower incomes or who have not participated in employer-sponsored retirement plans. That said, what is the magic number needed for a comfortable retirement?
Well, determining how much you need to save for retirement can be a complex task. The “retirement savings number” is a benchmark figure that represents the amount of money you should aim to accumulate by the time you retire. This number varies based on several factors, including your lifestyle, anticipated expenses, and retirement goals. Here’s a guide to understanding retirement savings numbers and how to calculate your own.
1. The 25x Rule
A commonly cited rule of thumb is the 25x rule. According to this guideline, you should aim to save 25 times your expected annual retirement expenses by the time you retire. This figure is derived from the concept of the “safe withdrawal rate,” which suggests that withdrawing 4% of your retirement savings annually is a sustainable strategy. By saving 25 times your annual expenses, you create a cushion that allows you to withdraw 4% each year without depleting your savings too quickly.
Example: If you estimate that you’ll need $50,000 per year in retirement, you should aim to save $1.25 million (25 x $50,000) by retirement.
2. The 15% Savings Rule
Another practical approach is the 15% savings rule, which suggests that you should aim to save 15% of your gross income for retirement throughout your working life. This includes contributions to employer-sponsored retirement plans, individual retirement accounts (IRAs), and personal savings. Adjustments to this percentage might be necessary based on your specific retirement goals, but 15% is a good starting point for building a solid retirement fund.
Example: If your annual gross income is $70,000, saving 15% would amount to $10,500 per year.
3. Retirement Savings Milestones
To ensure you’re on track, consider setting specific savings milestones for different stages of your career. Financial experts often recommend the following benchmarks:
- By Age 30: Aim to save at least one year’s salary.
- By Age 40: Target two to three times your annual salary.
- By Age 50: Aim to have four to six times your annual salary saved.
- By Age 60: Aim for six to eight times your annual salary.
These milestones provide a general guideline, but individual circumstances and retirement goals should guide your savings strategy.
4. Consider Inflation and Investment Growth
When calculating your retirement savings number, it’s essential to account for inflation and investment growth. Inflation erodes the purchasing power of your savings over time, so your retirement fund needs to grow to keep pace with rising costs. Similarly, investments should be allocated to generate growth and income. Working with a financial advisor to project future inflation rates and investment returns can help you set a more accurate retirement savings goal.
5. Tailor Your Savings Plan to Your Lifestyle
Your retirement savings number should reflect your personal lifestyle and goals. Consider factors such as desired retirement age, travel plans, healthcare needs, and living arrangements. For example, if you plan to retire early or have higher healthcare costs, you may need to save more aggressively. Conversely, if you anticipate a modest retirement lifestyle or expect other sources of income (such as pensions), your savings target might be lower. You should also consider how you plan to withdraw your retirement savings. For example, do you want to leave a portion of your savings for your children? There is also tax implication depending on the country/ region you plan to retire in.
6. Regularly Review and Adjust Your Plan
Retirement planning is not a one-time task. Regularly reviewing and adjusting your savings plan based on changes in your financial situation, lifestyle, and market conditions is essential. Annual check-ins with a financial advisor can help ensure you stay on track and make necessary adjustments to meet your retirement goals.
Conclusion
Determining your retirement savings number involves understanding key guidelines like the 25x rule and the 15% savings rule, setting milestones, and considering factors like inflation and investment growth. Tailoring your savings strategy to your personal goals and regularly reviewing your plan will help you build a robust retirement fund. By taking a proactive and informed approach to retirement planning, you can work towards achieving a comfortable and financially secure retirement.
With that in mind, another important question that arises after reading this article is whether you should prioritize saving for retirement or paying down your mortgage. Saving for Retirement vs. Paying Down Your Mortgage: What Should You Prioritize?