Is your retirement on track?
With today's uncertain economic environment, it is even more critical to do the math, know the facts, plan prudently and make sure you stay on track for retirement.
Let's say you've been saving for retirement and you're in the middle of your earning years.
How are you doing?
It's hard to know offhand. Many
of us are not savvy about investments and
feel overwhelmed with the numerous money decisions
that we face. What's more, it's often difficult
to conceptualize our retirement days, whether
they are many years from now or around the
To get an accurate picture you might want to enlist the services of a fee-based financial planner.
Watch a video on choosing a financial adviser.
For a quick idea, read on. A study that appeared last year in the Journal of Financial Planning provides a way to determine if you're on track or if you need to step up your savings.
The study's authors assume that
you will need to replace 80 percent of your
pre-retirement income -- your gross salary
minus the amount you've been saving for retirement.
The reasoning: You won't be saving for retirement
once you're retired. The authors also assume
that pre-retirement earnings and post-retirement
cash flow needs to grow in line with inflation
at 2.5 percent annually, and that upon retirement
you will use the money to purchase inflation-indexed
annuities that guarantee income for life.
Check out the table for an indication of what your current savings rate should be. For example, let's say you're 40 years old and you earn $60,000 a year. If you have not saved anything up to this point, your savings rate should begin immediately at 17.6 percent.
Crunching the numbers
Now let's assume you're 40 with an income of $60,000, and you started saving at an earlier age. Right now you have $100,000 saved up.
What should your savings be in that case?
Take the amount you saved so far and divide that by $10,000. If you've saved $100,000 so far, dividing by $10,000 equals 10.
Now multiply that (10) by 0.57 percent (the figure in the fourth column of the table). The result is 5.7 (10 x 0.57 = 5.7).
Now subtract the 5.7 from 17.6 percent (the figure in the third column). The result is 11.9 percent. This means that if you're 40 years old with an income of $60,000 and savings of $100,000, you should now be saving 11.9 percent of your gross income
This study takes Social Security
income into account, which replaces a higher
percentage of income for low-wage earners
and a lower percentage of income for high-wage
earners. (To simplify their calculations,
the authors assume that full benefits are
available at age 65, but in reality, the study's
authors recommend that you wait until full
retirement age to collect the full benefit.)