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When I was younger, a close friend of my parents used to tell me regularly that if I saved 10% of every dollar I made, I would be a millionaire in retirement. As I got older, I saw this 10% target retirement savings rate referenced in personal finance books and by financial planners. While I love the simplicity of the 10%, it always bothered me that the rule was so consistent. What if you saved more while you were younger? What if you were already 35 and hadn’t started saving yet? Would 10% be enough? Or maybe too much?
The basics of consistency and thoughtful spending are universal for long-term financial success. But after that, personal finance is unique to each of us and our goals. So, after years of wondering, I created a simple worksheet to help you determine your own personal target retirement savings rate. Just enter a few numbers that reflect your situation and views of the world and find out how what percentage of every dollar you make you need to save to reach your retirement goals!
Using the Target Retirement Savings Rate Calculator
The Target Retirement Savings Rate calculator is easy to use and walks you through each and every step. However, I thought it would be helpful to show an example of how the calculator works for a sample couple!
Inputting Your Basic Information
In this example, John and Mary are 33- and 32-years-old respectively, and they both work outside the home. (If you don’t have a spouse, you can just zero out those boxes!) John makes $60,000 a year and expects to get annual raises of 2%. Mary also expects to get raises of 2% but makes slightly less at $45,000 a year. So far, in their 401(k)s and other investment accounts they have put away $33,000 for retirement. A great achievement!
Add Your Retirement Goals and Investment Outlook
Now that you have entered where you stand today, it is time to put in your assumptions about the future! When do you plan to retire? How much will you need to spend each month in retirement? The worksheet looks like this, though some of the instructions below are also shown in the download so you don’t have to refer back and forth!
John and Mary’s assumptions are filled in below.
- Target Retirement Age: At what age do you want to retire? Do you think you will retire at the traditional age of 65 or aim to retire early and pursue more of your passions? Feel free to play with these ages to see how it impacts your target retirement savings rate. Sometimes a small increase in savings can buy you a few more years of retirement!
- Family Expected Monthly Retirement Expenses: How much do you plan to spend each month in retirement? Feel free to use your current spending as a guide, but remember that some expenses change in retirement. You will no longer have to commute (woo!) or purchase a work wardrobe, but you may want to travel more! Don’t build inflation into this number as the worksheet does it automatically!
- If you don’t have a budget today, I highly recommend setting up a regular budget. It is the only way to know how much you’ll need in an emergency or in retirement.
- Monthly Social Security Estimate: If you are 30 years away from retirement, Social Security may look different when you cut into your farewell cake. But, despite scary headlines, it is unlikely to completely disappear. The Target Retirement Savings Rate spreadsheet uses your current income, along with the 2017 Social Security benefit formula, to roughly estimate how much you could expect to receive from age 65 on.
- Advanced – Haircut to Social Security: If you plan to retire before 65, won’t have 35 years of work history when you retire, or if you believe Social Security will be significantly diminished in the future, you can reduce the benefit by haircutting it. If you think Social Security won’t exist at all for you, put in 100%.
- Expected Annual Investment Return: This will depend on how your money is invested (stocks, bonds, CDs, cash) and your overall asset allocation. Over the past 100 years, the S&P 500 has averaged an annual return of 10%. I believe a 7% rate is a fair estimate for people 10 or more years away from retirement with an 80/20 stock-bond split.
- Inflation Estimate: Inflation has averaged about 2% a year over the long-term and as such is a fair estimate. But if you think inflation will be higher or lower, or just want to see the impact of that inflation on your savings needs, you can change it here.
- Advanced – Withdrawal Rate: Your withdrawal rate is what percentage of your savings you need to withdraw per year to live in retirement. Backtesting has not shown a period where a 4% withdrawal rate depleted a nest egg in less than 33 years. As such, it has become the baseline for retirees. But a 3% withdrawal rate is even safer, while a 5% rate is more aggressive and could be depleted within your lifetime if the market moves against you.
See Your Savings Rate Goals!
Once you input your assumptions, the worksheet will automatically let you know how much of each dollar you make needs to be put into retirement accounts to reach your goals! It will also show you the total retirement account value you need to see before you give your notice.
Try not to be daunted by a potentially large number! You’ll save progressively over the years. And growth on the dollars you invest over time will help you reach your goals.
John and Mary, together, need to save $2.27 million dollars before they retire at age 65. For them, this means they need to save 12.8 cents of every dollar they make between now and their retirement age.
While the $1,118 a month they need to put away this year is a little scary for them, John has realized that their employers are helping them out! Both John and Mary’s companies offer a 50% match up to 4% in 401(k) contributions. Since they both already max out this match, contributing 4% of their paycheck to their 401(k), they are already saving 6%! This reduces their monthly savings need this year to $524 from $1,118. A much more manageable number!
Don’t forget to build your existing employer retirement contributions, plus match, into your savings rate!
Bonus: How Will Your Nest Egg Grow Over Time
The goal of this worksheet was to give you a frame of reference for your retirement savings rate needs. But, to help you see how your rate will grow your nest egg over time, I wanted to include a quick asset projection. This chart shows you how your retirement accounts could look if you maintained your savings rate.
It also shows you how that value would deplete in retirement! Most people move their investments into safer options once they retire, to preserve their wealth. But depending on how conservatively you invest that money in retirement, the faster you will use up your nest egg. You can change your expected investment return in retirement in this part of the worksheet to see how your family’s savings would move over time.
What I love most about this chart is that it shows how John and Mary, both middle-income earners, can become multi-millionaires. And this doesn’t even include the value of their home! If they can save consistently over time, and prioritize their future, they will end up in an amazing place!
Download the Target Retirement Savings Rate Calculator
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What percentage of your income do you need to save to reach your goals? Are you saving more or less than that today? How can you make changes to reach your goals? Drop a note in the comments and let me know about your unique situation!
This post was proofread by Grammarly.