Are you anywhere near your benchmark retirement savings goals?

[QuarterMillionMan]

According to this article you should have 8x your salary in retirement by age 67. At almost age 50 (48 to be exact thank you very much) my current retirement savings is only about 2x's my salary. At only about $150,000 in retirement savings I am way below where I should be (argh).

http://bucks.blogs.nytimes.com/2012/09/12/suggested-retirement-savings-goals-by-age/?_php=true&_type=blogs&_r=0

[corn18]

8x ending salary @ 67 is one benchmark. The key to that benchmark is how they determine ending salary. They assume a 1.5% annual growth rate for salary. I started @ $20,000 / year in 1988 @ age 22 which wasn't a bad salary back then. It also wasn't a great salary back then. If you assume a 1.5% annual growth rate until age 67 (45 years), then they would assume a $40,000 ending salary. Wow, that is a pretty low standard to use. I would say that as with all benchmarks, the longer the forecast period, the greater the probability of being really wrong.

I really like the 25x or 4% Rule of Thumb (ROT). Have enough saved by retirement age (whatever age you pick) so that you can withdraw 4% / year and live off of that. If you can live off of $10,000 / year, you should have $250,000 in the bank at retirement age. $100,000 / year: you should have $2.5M in retirement savings. Even if you retire at an early age, this 25x rule should keep you going forever.

That's quite a range, isn't it? 8x - 25x. If you want to retire with $100,000 of income, this would be a range of $800,000 to $2.5M of required savings. Holy crap. No wonder we're all cornfused.

The 8x assumes you get Social Security, your savings growth rate is 5.5% (no mention of inflation assumptions), you start withdrawing @ 67 and you die @ 92 with no money. All of those assumptions reduce the amount of savings required.

The 25x ROT assumes an annual growth rate of 7%. Why not 4%? Well, if your savings grows at 4% and you withdraw at 4%, the balance remains constant and so does your withdrawal. But inflation will diminish your buying power during retirement. The 7% growth rate allows for annual cost of living increases of 3% to account for inflation. No other assumptions are made. You die whenever you die with the exact same amount of money you started with. If you achieve zero growth, you can live off the balance for 20 or so years before it runs out.

So which one is right? Both. Neither. Who knows. I look at it from a probability of stress perspective. At 25x, I have a 90% probability of a stress free retirement, at least from a "do I have enough to retire" perspective. I don't need a lot of good fortune to succeed at 25x. At 8x, I need some help to make that work. My stress level in retirement is likely to be higher if that help doesn't happen (Social Security isn't there, market tanks, I HAVE to work until I am 67, I HAVE to die at 92).

I'm shooting for 25x.

Tom

[Retired To Win]

... I really like the 25x or 4% Rule of Thumb (ROT). Have enough saved by retirement age (whatever age you pick) so that you can withdraw 4% / year and live off of that. If you can live off of $10,000 / year, you should have $250,000 in the bank at retirement age. $100,000 / year: you should have $2.5M in retirement savings. Even if you retire at an early age, this 25x rule should keep you going forever...

Great explanation, Tom...

You can see how HUGELY important your retirement budget is to these calculations. Cut that retirement budget by $1000 a year and you lower your retirement savings goal by $25,000. And how much time chained to the job could you cut if you did not have to save that $25,000?!

I went through that eye-awakening analysis 5 years ago and opted to retire sooner.

I've spelled out my thinking in my April 27th blog post:
Budgeting to Reach Freedom:

http://retired-to-win.savingadvice.com/2014/04/27/budgeting-to-reach-freedom_108560/

Cheers.

[dczech09]

I agree with Tom on the 25X Rule of Thumb. At a 4% withdrawal rate, you almost guarantee that you never run out of money no matter how long you live. That leaves a large sum of money for your estate.

I think the 8X your income rule is WAY too low! You would run out of money pretty quickly. Yes, it assumes Social Security. But at the age of 26, I am not relying on Social Security being around in 40 years! No way, no how!

With all of that being said, I believe that the X income rules are a little arbitrary. For all I know, I could be making TWICE what I currently make by the time I am 30. At my current pace, at age 30, I will have more than 1 times my income (I currently have over 0.50X). But if my income were to all of a sudden increase, that changes the proportions.

What if someone makes like $500k every year? It is going to be a little tough for them to save up 25X their income bay age 67. Reason being is that they have few tax advantaged options for saving available to them, and the ones that they do have are maxed out without even blinking an eye.

So it is a little arbitrary, hence why it is only a rule of thumb. It is general.

[KTP]

We are shooting for about 32x income because we are retiring earlier (about age 45). We are at 28x right now. Just need a little more juice out of this bull market.

[Reggie]

25x is absurd. That is 7.5million. Are you kidding?!?

It's better to look at expenses versus income.

I have a little over 300k and I'm almost 40. My husband has about the same but he will have a second pension by then.

We are a little behind but I really don't know how to account for the pensions properly to come up with a good estimate.

[corn18]

25x is absurd. That is 7.5million. Are you kidding?!?

Depends. 25x current income could be ludicrous. if you make $300,000 / year now, then I can see how 25 x your current income is absurd. But that's not what the "x" part of 25x means. "x" is your required income during retirement. For me, I have that as $150,000 / year. I make a lot more than that right now.

It's better to look at expenses versus income.

I have a little over 300k and I'm almost 40. My husband has about the same but he will have a second pension by then.

We are a little behind but I really don't know how to account for the pensions properly to come up with a good estimate.

I have a military pension of $44k / year. To account for that is really simple:

$150,000 Annual income I think I need in retirement
-$44,000 pension
=$106,000 this is the amount of income my retirement savings must generate

25x$106,000 = $2.65M This is how much I want to have for retirement.

What's nice about a pension is the value can be computed. $44,000 x 25 = $1.1M. So that military pension is worth about $1.1M in the bank. Since it's a military pension, I'm betting it's always going to be there. Not sure I would make that bet on all pensions.

Tom

[kork13]

Agreed that 8x income for most people will be insufficient... I mean, it'd get you by, but you'll be heavily reliant on Social Security, and there is a significant chance of outlasting your money.

I'm 27, and currently have $110k in retirement. My current goal is to generate an income of $80k-$100k/yr (today's dollars), which is also about my current income. I'm definitely using the 25x expenses as my planning rule of thumb though.... I can't even compare myself to the linked ROT, because I'm at least 8 years ahead of that (calls for 1x income at age 35--at 27, they'd have me with almost nothing!). So by my ROT, I'm already above 1x my income goal right now, which thankfully is quite good for my age.

[KTP]

It isn't 25x income it is 25x expenses.

If you spend $40,000 a year then you need around $1,000,000

If you spend $300,000 a year then yes you need $7,500,000

If you make $1,000,000 a year but only spend $40,000, then you need around $1,000,000 to retire.

[corn18]

It isn't 25x income it is 25x expenses.

Technically, it's 25x your required annual retirement income (that's what you will be withdrawing each year and it is before taxes come out). If all of your retirement income is tax free, then income required = expenses. Not sure how many folks have 100% tax free retirement income. I certainly won't.

For me, $150,000 of retirement income is required to cover $116,000 of retirement expenses (most of my retirement income will be taxable). So I will be withdrawing $150,000 / year to cover expenses and taxes. So I want 25x $150,000, not 25x $116,000.

Or to make it really simple, you could just count taxes as an expense.

Tom

[97guns]

Not sure how many folks have 100% tax free retirement income. I certainly won't.

my income has been tax free the past 3 years, all RE income with nice depreciation and BIG flat rate auto expense, my properties are 70 miles away and i go to them 2x a week they allow a .75 per mile deduction, works out to $105 per trip, $210 a week, $840/mo., $10,080 for the year

[KTP]

my income has been tax free the past 3 years, all RE income with nice depreciation and BIG flat rate auto expense, my properties are 70 miles away and i go to them 2x a week they allow a .75 per mile deduction, works out to $105 per trip, $210 a week, $840/mo., $10,080 for the year

You don't even have to go to that extreme.

A married couple has about $21,000 of deductions/personal exemptions standard.

Dividend and long term capital gains are taxed at 0% for the 15% bracket and below.

So if your interest income from CDs, bonds is less than $21,000 (pretty easy in today's market with rates paying so little) and you get the rest of your gains from dividends and stock sales, you could earn $60,000 to 70,000 a year and pay zero tax.

[Reggie]

25x expenses seems more realistic.

My DHs pension is military retirement. He retired a few years ago and gets about $55k a year. His second pension will also be government pension. I have a tiny pension but almost all of my retirement will have to come from my 401k and social security. I currently save 17.5k in 401 and 12k in an IRA. Hopefully that will be enough.

I'm scared of retirement but excited to pay less taxes.

[snafu]

This is the topic that runs my planning off the rails. I've no idea what our household income will be in 5 years since we have variable income. I'm shocked to my shoes at how much our Retirement plan has escalated over time in spite of the beating 2009 - 2011. 4 years ago our government offered a saving program similar to ROTH so we've funded that 1st and continued Retirement contributions.. DH will get a modest defined pension at 65 with death benefit that reverts at a lower rate. We think the retirement age will adjust slowly over time from 65 to 75 with unfunded liability like SS, [Cnd. SIN, OAS] dispensed in later years like 70, 72, 75.

I've spent a lot time time talking to folks who live in this complex [mostly retired] 50 - 70's I'd guess. The consensus seems to be that the figures suggested by bankers and investment firms have more to do with transferring your money to their commissions. The one codicil revolves around how you see yourself as a retiree. I'm aware of major travelling by the 50-65 y/o group; the older folks are snowbirds who leave after 1st major snowfall and return in time to file tax in April. In the summer everyone has grandchildren come for prolonger visits. Folks who are accustomed to living debt free have a different experience that those who loose a significant percentage of income to interest.

[Petunia 100]

25x expenses seems more realistic.

My DHs pension is military retirement. He retired a few years ago and gets about $55k a year. His second pension will also be government pension. I have a tiny pension but almost all of my retirement will have to come from my 401k and social security. I currently save 17.5k in 401 and 12k in an IRA. Hopefully that will be enough.

I'm scared of retirement but excited to pay less taxes.

Do you mean combined yours and his?