Saving for retirement, especially in the beginning, wasn't very satisfying to me. I put a small amount of money in a 401(k) every paycheck. My employer put in an even smaller amount. The total grew sluggishly. The day that I would claim this retirement savings seemed far away.
At one point, I was an unemployed single mother for nearly a year, and I considered raiding that pot of money -- but I didn't. Fifteen years later, I'm 59, remarried, working steadily -- but eying retirement -- and glad that I kept my hands out of the cookie jar.
Saving for retirement would be a lot more satisfying if it were easier to measure progress along the way -- a yardstick and maybe a little "attaboy" reward now and then for staying on track. That's why I like this tool from the Principal Financial Group, which makes it very easy to see whether your diligent savings is paying off and your money is growing. The reward? Confidence that a comfortable retirement is ahead.
Their chart makes these retirement planning assumptions:
- A 40-year career.
- Savings rate (as a percent of employment income) = 13 percent.
- Wage growth rate (annual) = 4 percent.
- Hypothetical rate of return (annual) = 8 percent.
- Inflation rate (annual) = 3 percent.
- Retirement age = 65.
- Income replacement ratio = 85 percent.
- Social Security replacement ratio = 40 percent.
- Reasonable inflation-adjusted withdrawal rate (annual) = 4.5 percent. (After age 70, a withdrawal rate of 5 percent may be used)
To use the tool, divide the amount you have saved for retirement so far by your current employment income.
Now, compare your number to the chart below. Look at the left side of the chart and identify where your number would fall. Then, move right on the chart until you are just above your current age. Is this spot above or below the orange line? If your spot is above the line, then congratulations and keep up the good savings effort. If you find yourself below the line, now's the time to think hard about your savings strategy.
Noelle Fox, co-author of this tool and the accompanying report and practice leader in the retiree services division for Principal, says there are three solutions if you're coming up short:
- Save more.
- Delay retirement.
- Plan to live on less in retirement.
Fox recommends saving more and points to this example as an indication that saving a small amount more can make a big difference over time. Cable television currently costs about $75 per month. If at age 25, you decide to forgo cable television and instead invest that amount for retirement -- assuming an investment return of 8 percent annually -- saving an inflation-adjusted $75 per month for 40 years would result in an additional nest egg of $375,000 in today's dollars.
As the Department of Transportation says, "Small inconvenience for long-term improvement."