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That is how one can inform whether or not your retirement provision is heading in the right direction

From Lyle Solomon, Next avenue


When you are saving for retirement it is beneficial to know how much you need to save and if you are on the right track. Of course, everyone’s situation is different, but there are some useful retirement benchmarks that can give you a sense of how you are achieving your goals.

After you’ve compared your numbers with the benchmarks, you can then work on any necessary adjustments and regularly review your progress.

To set your retirement savings benchmark, you need to consider two factors – how much you’ve already saved for retirement and your current age. Then compare your savings to your current gross income to set savings goals based on your income.

What is a Good Retirement Goal? Many financial institutions and experts have some guidelines to answer this question.

Retirement Policy

For example, Fidelity Investments has created the following benchmarks based on age for people between 50 and 60:

Loyalty Investments

Similarly, T. Rowe Price has developed its savings benchmarks and JP Morgan has created “checkpoints for retirement planning”.

Another benchmark concept: The goal is to replace almost 80% of your current annual income in retirement so that you can maintain your lifestyle in retirement.

The big unknown, of course, is how long you will live and how long you want your savings to last. For an estimate, try the Social Security Agency’s life expectancy calculator. Here is an example using the 85% rule and life expectancy estimates:

For example, let’s say you were born in 1970 (you are now 51) and you want to retire at 67, so you will retire in 2037. Let’s say your annual income is $ 40,000. If you want to live 20 years after retirement, you need ($ 32,000 x 20) = $ 640,000 in retirement savings.

The 4% rule for withdrawals in retirement

Another widely used measure of how much of your retirement savings you can afford each year in retirement is the “4% Rule”. As the name suggests, this means that you withdraw 4% of your retirement savings annually (adjusted for inflation every year after the second year).

For example, if you had $ 1 million in retirement savings, you would withdraw $ 40,000 the first year and $ 40,000 plus inflation by the second year.

The 4% rule has been an excellent basis for years to ensure that retirement provision lasts for around 30 years.

But lately, financial experts like Wade Pfau, professor of retirement income at the American College of Financial Services CBFV, have been saying this rule needs to be adjusted given the current low interest rates and the possibility of inflation.

With a payout rate of 4%, you could run out of money in 30 years. Instead, given the current economic conditions, they are more likely to recommend 3% per year.

David Blanchett, director of fixed income research at Morningstar Investment Management, said on CNBC, “3 percent is the new 4 percent.”

Allan Roth, a certified financial planner with Wealth Logic consulting firm in Colorado Springs, Colorado, also believes in the 3% rule. And he said, “There are many other factors that contribute to low-risk payout percentages. Age, health, life expectancy, and the amount of guaranteed monthly income from sources such as social security and pensions are also important considerations.”

Some financial advisors also say that the 4% rule might be too risky for some people as it assumes you hold a portfolio of 50% stocks and 50% government bonds.

The 3 A’s of old-age provision

When determining the need for savings, it also helps to take into account the 3 A’s of old-age provision:

  • quantity: Experts recommend saving at least 15% of your pre-tax income annually if you can
  • account: Consider your other sources of income after retirement, such as social security benefits, employer pensions, fixed and retirement accounts such as 401 (k) s and IRAs, and any part-time employment income
  • Asset mix: The higher the proportion of your retirement savings in stocks, historically, the higher the return on your portfolio

If after these benchmarks you find that you are not on the right track, don’t lose hope either. Focus on what you can do to get fit again. That could mean topping up on your annual savings, opening or funding a retirement account, investing less conservatively, or using a health savings account to save on retirement and medical expenses.

Hiring a good financial advisor can also be useful. This professional can show you ways to get on track and work with you to stay on the ball.

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