The One-Minute Test: Are Your Retirement Savings on Track?

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Whether you're a few months or a few decades from retirement, everyone knows it's smart to prepare by saving and investing. But how much money should you save to have enough? While there's no crystal ball to tell you the exact amount of savings you'll need for a comfortable retirement, using age-based savings benchmarks can be a fast and easy tool to see if you're on track. 

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What are benchmarks?

Age-based financial benchmarks provide a quick assessment of your financial health. Benchmarks are savings goals that are tied to your age and current income. 

There are many online calculators that will give you an overall amount that you should save for retirement. Benchmarks are useful as they break this big goal into shorter-term goals.

Most benchmarks are usually calculated with the assumption that you will not need to replace your entire income in retirement and that you will receive some Social Security payments. While they're not perfect calculations, benchmarks can be useful in determining whether you're saving enough for retirement.

How's your savings progress?

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Some benchmarks set by T. Rowe Price can be used to calculate the savings targets you should strive to reach by different ages. Find your age and calculate your savings goal by multiplying the number in the second column by your current income. 

Age Multiple of Your Current Income You Should Have Saved

Example: Savings Goal if Your Salary Is $60,000

30 0.5x $30,000
35 1x $60,000
40 2x $120,000
45 4x $240,000
50 6x $360,000
55 8x $480,000
60 10x $600,000
65 12x $720,000

Note that T. Rowe Price's benchmarks are based on a number of assumptions that may not apply to you. Namely, they assume that during your career, you allocate 60% of your portfolio to stocks, 30% to bonds, and 10% to short-term bonds. If retirement is a long way off and you invest more aggressively (i.e., allocate more of your savings to stocks), then you may far exceed these benchmarks. If you invest more conservatively by favoring bonds, then you'll be more likely to fall behind.

Are your savings on track? Whether that quick calculation made you rejoice or worry, read on to learn about other considerations for evaluating your retirement savings progress. 

Other factors to consider

While benchmarks are a useful tool to determine whether your current savings and investments are on track, they can't tell the whole story. T. Rowe Price's benchmarks assume you will need only 75% of your current income as a retiree, because people's expenses frequently decrease in retirement.

The way you plan to spend your time in retirement will influence how much you need to save. If you plan to spend your time volunteering in your community or hanging out with your grandchildren who live in town, you'll probably spend less than your current income in retirement. However, if you plan to spend your retirement traveling abroad, you'll likely need to save more than the benchmarks indicate.

Another huge driver in retirement spending is healthcare. T. Rowe Price recently adjusted its benchmark multiples to address the increased costs of healthcare and longer lifespans. A couple can expect to spend $275,000 in retirement for out-of-pocket healthcare expenses. That estimate is up 6% from the prior year, and it continues to rise. It also does not include any type of long-term care, which most retirees will need at some point. 

Additionally, these benchmarks assume you will receive some income from Social Security benefits. Without reform, Social Security is unsustainable at its current benefit level. The Social Security Board of Trustees estimates that the program will be able to pay full benefits until around 2034, but after that it will only be able to pay about 75% of the currently promised benefits. There are a number of proposals to resolve this funding shortfall, including increasing the payroll tax and reducing benefits for higher earners. It's unknown at this time how or when Congress will address the impending Social Security deficit or how any change will affect your future benefit. 

Uh oh, I'm behind. How can I catch up?

If you've found your benchmark and discovered that you're behind on your savings, it's time to make a plan to catch up. There are several ways to accelerate your savings.

First, review your budget and make cuts wherever possible so you can save and invest more. Increase your contributions to employer-sponsored retirement plans or your IRA. If there's nowhere in your budget to cut, consider getting a second job or finding a way to get paid for a hobby.

If payments for your big house or new car are interfering with your ability to save for retirement, downsize your house or car so your monthly payments are lower and you'll have more to save. Does that sound like an extreme measure? Maybe so, but you don't get a second chance to save once you retire.

If you're over 50, take advantage of catch-up provisions that allow you to contribute more money to your workplace retirement plan or your IRA. You may also decide to postpone retirement for a few years to shore up your savings and spend fewer years drawing down your nest egg.

Using age-based savings benchmarks is fast and simple. They are imperfect, as you cannot know exactly how long you'll need to live off of retirement savings or what the future has in store for you. However, benchmarks can at least provide some encouragement if you're been working hard to save -- or a gut-check if your savings are falling short.

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