Not surprisingly, saving for retirement is a popular topic of discussion for a financial adviser like myself. But what is surprising, at least to me, is the lack of true commitment most people make to retirement savings.
To that point, a recent survey by the Employee Benefits Research Institute (EBRI) found that 56 percent of American workers admit that they and their spouse haven’t even calculated how much they should have saved by the time they retire.
Not surprisingly, the same survey found that over half of Americans are either “not confident” or “not too confident” they’ll have enough money saved to live comfortably through their retirement years.
Unfortunately, retirement savings is not a “cross that bridge when you come to it” type of problem. If you don’t plan and save for retirement now, you’re not even going to have a bridge to cross in the future.
Saving is the key to your future comfort.
The Center for Retirement Research suggests that people need about 80 percent of their pre-retirement income in retirement to maintain their pre-retirement living standard. The savings rate needed to hit this target depends on several factors including earnings, the age at which you start saving, retirement age, and asset returns.
For example, the average earner who starts saving at 35 and retires at 67 needs to save 18 percent each year, assuming a 4-percent return. The comparable rate for low earners is 12 percent and for high earners the rate ticks in at 22 percent.
Those are big (and daunting) percentages no matter where you fall on the earnings spectrum. It is possible to notch the percentages down a bit if you start saving earlier and work longer, but the reality is still there — You need to save (more than you think) now to ensure you’ll have money to spend later.
If you aren’t coming close to saving at least 15 percent for retirement don’t roll over and give up. Instead, bump up your savings rate a percent or two each year for the next few years. Studies (or a compounding interest calculator) show that in the early and mid-stages of retirement savings accumulation, how much you save is much more important than investment performance.
Many of the factors that go into retirement planning are out of your control. You don’t know the exact age at which you will retire, you don’t know exactly how much money you will need, and you certainly don’t know how long you will live. The one thing you can control is your savings rate. Taking control of it today could lead to a much happier tomorrow.