Here's How Much Money You Should Have Saved for Retirement

Saving for retirement gets a lot of attention in the personal finance world, and rightfully so. Consider this fact: Your retirement could easily last 30 years -- for a healthy 65-year-old couple, there's a 48% chance that one spouse will live to 90, and a 21% chance one will reach 95.

That's a long time to plan for, and you'll need to save a significant nest egg, because Social Security won't be enough to support your lifestyle. But how much is enough? If you're are currently investing for your senior years, are you on track to hit your goal? J.P. Morgan's recent guide to retirement offers some helpful ballpark benchmarks to get familiar with.

Retirement savings checkpoints

On any journey we take in life, it's a good idea to periodically pause, check our progress, and ensure we're on the right track -- and if we're not, determine what adjustments need to be made. J.P. Morgan's retirement guide has a handy chart that shows how much money people should have saved by different ages, based on their current incomes.

Retirement savings checkpoints as a multiple of current annual income, at selected ages and income levels

Current Age $60,000 $80,000 $100,000 $125,000 $150,000
30 .9 1.3 .6 .8 1.0
40 1.9 2.5 2.1 2.3 2.7
50 3.4 4.3 4.2 4.6 5.1
60 5.6 6.8 7.3 7.9 8.7

For example, a 40-year-old with a household income of $60,000 should have 1.9 times their annual earnings saved for retirement -- $114,000. This figure assumes the person will keep saving 5% of their income, earn a 6% investment rate of return prior to retirement, earn a 5% rate of return in retirement, and that the inflation rate is an annualized 2%.

Interesting enough, a 40-year-old who's earning $150,000 should have 2.7 times their income saved -- $405,000. The higher savings ratio has to do with the annual savings rate. The checkpoint assumes those earning more than $100,000 a year save 10% of their income, versus the 5% savings rate for those earning less.

A weakness of the study is that it doesn't address home equity, or how the money you put toward your home is counted toward your savings number. This is unfortunate since a house is usually the largest asset a middle-income family will own. So just know that if you eventually plan on selling your house or downsizing, and routing the profits toward your retirement, then that money should be counted toward your savings checkpoint.

Overall, the chart provides a reasonable estimate of what you ought to have saved at various points in your life. The average growth rates of 6% and 5% are entirely reasonable, and annualized inflation rate of 2% should be be fine for now, though if inflation ratchets up, or the market's long-term returns decelerate from their historic rates, then the chart will turn out to have been too conservative.

It's worth noticing how relatively low the multiples are for those early in their careers. While a 60-year-old earning $100,000 ought to have 7.3 times their income set aside, a 30-year-old with the same income needs only 0.6 times their earnings. This is a testament to the power of compounding growth on investment returns over long time periods. People who are closer to retirement, or who have been procrastinating their savings, should take heed.

Bridging the gap

If your savings aren't where the chart indicates they should be, there are several steps you can take to start closing the gap.

First, try bolstering your savings rate, by increasing the share of your paycheck that's routed directly into your 401(k) or IRA. Start with small changes, and go from there. I'm willing to wager your immediate lifestyle won't change much by setting aside another percentage point or two from each paycheck. If you haven't reviewed your monthly cash flow recently, try using a budget calculator for a while to help you get a handle on where your money is being spent, and see how much fluff there might be in your finances that you could redirect into savings.

Second, consider starting a side hustle, like 37% of Americans now have, according to a 2018 Bankrate study. Some extra income you can direct toward your retirement accounts will help your grow your nest egg, and it's income you're not used to spending on other things. There are also retirement plan options available to people who are self-employed.

Lastly, consider how you are saving and evaluate your investment strategy as it relates to taxes. All the prior recommendations are focused on investing in retirement accounts for one reason: tax-deferral.

You're losing out if you're using a regular brokerage account, buying certificates of deposit (CDs), or using other investment vehicles that are taxed each year, before maxing out your ability to contribute to tax-advantaged accounts like an IRA or a 401(k).

Prioritize where you put your hard-earned cash.

If you haven't set up an emergency fund entirely separate from your retirement savings, prioritize that until it's robust enough to get you through hard times -- at least a few thousand dollars. If debt is dragging down your budget, make paying off credit card and student loans an immediate goal.

But don't stop saving for retirement while you're working on those things -- and certainly don't miss out on any matching your company offers for 401(k) contributions: You should always contribute at least enough to get the full employer match in your 401(k). Read up on Roth IRAs and Roth 401(k)s, both of which can help you invest in a tax-efficient way for retirement.

Rome wasn't built in a day, and your retirement nest egg won't be either. But by following the time-tested advice of starting early, stretching your savings goals along the way, and being tax-smart, you can construct a portfolio that will give you the retirement you're aiming for.

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