Saving for Retirement
The American View
Many people are overwhelmed by the responsibility of having to amass enough cash for retirement. Only about half of workers participate in a workplace retirement savings plan, according to the US Bureau of Labor Statistics. And once they have a retirement account, few people ever do their math's on how much money they’ll need to be able to retire or check if they’re on pace to get there.
That’s why advisers use rules of thumb to help people understand how much money they should have saved by the time they retire, along with milestones they should aim for at certain ages along the way. For instance, you may have heard at one time or another that it’s good to save one times your annual salary by age 35. That is what investment firms used to recommend that people save when they’re starting out, if they wanted to have reasonable financial security in retirement. But now, it's believed, that’s not enough. It is often recommended that people save one times their salary by their 30th birthday. By the time they’re 35, savings should reach double their annual pay and by 40, a retirement account should hold three times a person’s salary.
The numbers keep growing, of course, all the way to age 67, by which time retirement savings should add up to 10 times a person’s pay. For people who have never stopped to think about how much income they’ll have in retirement or if they need to save more, this timeline could push some people to pause and do the math's, says Jeanne Thompson, a vice president at Fidelity Investments. It is thought that one of the biggest questions people have, especially as they’re starting out, is “Am I on track for when I retire?
Fidelity for example updated its guidelines recently to reflect a more conservative rate of return that, it says, is closer to what might be seen for a portfolio that is at least 50 percent invested in stocks. They now make an assumption that savings will grow by about 3 percent a year on average, compared to previous models that assumed a fixed rate of return of 5.5 percent a year, including inflation adjustments. The new rules are also meant to apply to a broader group of workers and savers. (The previous guideline was based on a person earning $70,000 p.a.)
Given how much Americans already struggle with saving, such numbers might hit some people hard. Too often, workers realise just years before they hope to retire that they don’t have anywhere near the amount of savings they’d need to pay the bills. Indeed, more than half of people aged 55 and above don’t have any money saved for retirement, according to a 2015 report from the US Government Accountability Office. And about half of those people aren’t getting a pension, leaving them with little to no retirement income outside of Social Security benefits. Still, this is just one guideline. And it is meant for people who plan to retire at 67 and who want to have their savings provide at least 45 percent of their pre-retirement pay.
Those people who plan to work longer, or who expect to have fewer expenses in retirement, should adjust the guide to meet their needs. It’s meant to give people some sort of a gauge, to encourage them, to get them interested and thinking about it. If this timeline scares you, use it as a prod to start thinking about what you could do to boost your savings levels. For starters, the guideline assumes that savers have been setting aside at least 15 percent of their pay throughout their careers, including any employer contributions. If you aren’t saving at least that much, that could be one target to aim for.
If you can’t save as much as you want to at the moment, set it up so that your contribution rate increases automatically by one or two percentage points each year. This is a good rule of thumb for the best-case scenario. Not everyone will be there but the closer you can get, the more comfortably you might be and live in your retirement.
