“How much should I have in retirement savings already?”
JP Morgan Asset Management offers a great starting point to answering this pertinent question. Even in a simplified scenario, this question is much more complex than it sounds, as the answer depends on how old you are and how much money you make. But by using this chart, which allows for individual differences of age and income, you can at least see if you are on track. JP Morgan’s “Guide to Retirement – 2019 Edition” they estimate a “Retirement Savings Checkpoint” figure by making some assumptions, which are:
In my experience, these assumptions are prudent and conservative. This analysis assumes people adopt the financial habit of saving 5% of gross income, which is a little low in my eyes. By using the chart below, you can dial into an amount of money you should have in the bank today. For instance, if you are 45-years old and have household income of $90,000, then you should be targeting
$90,000 * 3.5 = $315,000
in total investment savings (bank account, investment accounts, 401(k), IRAs, etc.). Note, this targets liquid financial assets, not your net worth (which includes the equity value of your home).
For individuals that plan to save 10% of gross income in the future, they do not need to have “as much” saved today, since it will be coming in future years. In the next example, if you are 45-years old and have household income of $100,000, then your Retirement Savings Checkpoint is actually lower than the first example. The basic math looks like this:
$100,000 * 3.0 = $300,000
in total investment savings (bank account, investment accounts, 401(k), IRAs, etc.).
It is my personal experience that many people are no where near their target figure. Effectively this means those “under savers” probably won’t be retiring when they are 62-65 years old, but instead may need to wait until much later. For individuals & couples who are at or above their “Retirement Savings Checkpoint”, a secure retirement is by no means a slam dunk. Therefore, even good savers should need to be crossing t’s and dotting i’s when it comes to retirement planning.
This analysis does not take many other facts into account, such as inherited wealth or home equity value. The analysis also assumes good health and that both spouses live until 92-95 (which is a little older than average). But longevity and health are often more dependent on genetics (family history) and lifetime access to healthcare services than an actuarial table would suggest. For couples that do have additional complexities to consider, a good financial plan can drill down to a refinement quickly. The number of circumstances you can take into account for these estimates is almost limitless.
Assessing What You Need to Save for Retirement
If you still have questions on where are vs. should be, don’t hesitate to call. Usually, I can make an intelligent assessment of someone’s current financial situation while we are on the phone.