Figuring out how much savings you’ll need in order to retire comfortably is, truth be told, more an art than a science.
The answer depends not only on what you hope to do during retirement — work part time? travel the world? — but on unpredictable factors that are largely out of your control, like your health and the performance of the stock market.
But don’t use that as an excuse not to try. The reason: People who have a retirement savings goal — even if that goal is a product of back-of-the-envelope calculations — are vastly more likely to retire comfortably than those without one. So get out your envelope. Here’s a quick-and-dirty way to estimate your retirement needs.
Find your multiplier
The most commonly used rule of thumb projects that the average retiree will need to save 11 times (some experts say 12) his or her salary at retirement age in order to be reasonably confident of having enough funds.
The problem with that ultra-easy method, of course, is that unless you’re very close to retiring, you have no idea how much you’ll be making when you decide to hang it up. So author Charles Farrell, in his respected book Your Money Ratios, crunched some more numbers and came up with multipliers based on your current age and income. In order to have a good shot at replacing 80% of your pre-retirement earnings, he recommends that you aim to have accumulated:
• 1.4 times your annual income at age 35;
• 3.7 times your annual income at age 45;
• 7.1 times your income at age 55;
• and 12 times your income at age 65.
If you’re already behind by that measure, don’t despair. Ratcheting up your savings rate may be enough to make up for lost ground. But even if you can’t catch up, the truth is that there isn’t a single path to a satisfying retirement. By living on 70% of your salary or working a few more years, you can cut the savings levels you need to reach by 10% to 25%.
And you can probably live on less. Planners typically suggest you aim to replace 70% to 80% of your pre-retirement income, which doesn’t amount to a dramatic lifestyle change once you eliminate the money you were saving, Social Security taxes, and commuting costs. But many retirees find they can get by on 50%.
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We’ll offer a more detailed guide to projecting your retirement needs further down the Road to Wealth. But another option is use an online calculator like this one from AARP.