It’s easy to do nothing and assume everything is going to work out. But when it comes to retirement, this is a recipe for disaster that will leave even the smartest individuals up a creek without a paddle. Keep reading to see if your retirement savings are on track or if they are in need of a boost.
What does retirement savings mean?
Retirement savings refers to the collective of accounts/income streams that you are preparing for use in retirement. While this list isn’t all-inclusive, some of the more popular items are:
- 401(k), 403(b), and 457(b) plans
- Individual Retirement Accounts (IRA) and Roth IRA
- Taxable savings such as a brokerage account
- Pension payments
- Real Estate such as a rental portfolio
- Social Security (I hope)
Like I said, this list is not all-inclusive. There are a ton of different ways to skin this cat, and I’m sure there are viable streams of retirement income that I’ve never even heard of. Maybe you patented something a few years ago and will be paid royalties until death, or have a side business that runs itself, either way, good on you.
The bucket method
This is not to be confused with the bucket method that smartasset talks about on their site. The Wealthy Idiots bucket method refers to streams of retirement income. The more buckets you have, the more bulletproof your retirement plan.
Example: an individual retires at 55, which is notably early. They have a pension, taxable brokerage account, 401(k), and small real estate portfolio that equally contribute to their income and also plan to collect Social Security at 62. This is four “buckets” of income with a fifth on the way. If one of those buckets were to go away, their plan would likely survive because it’s setup to hedge the risk of a failing account.
I am a huge proponent of the bucket method, and between my wife and I, we have a target of 8 buckets in retirement. We may not reach 8, but that’s the goal nonetheless. These buckets consist of pensions, 401(k)-style plans, Roth IRAs, rental income, and just maybe a Social Security payment.
How much do I need to save?
- 4% rule: if you retire at a normal age (i.e. not 27), you should be able to withdraw 4% of your portfolio per year and outlive your money. Be very cautious, as the likelihood of failure goes up the earlier you retire. Specifically, this method targets a 30-year withdrawal period.
- 25x expenses: let’s say you have $100k in yearly expenses at retirement. You have an expected pension of $50k a year and will need to supplement the other $50k with retirement savings. Based on the 25x method, you’ll want $1.25MM in retirement savings.
According to Forbes:
“We get the 25x Rule from the 4% Rule because if you multiply 4% of something by 25, you will get 100% of the original value. Four percent of $1.25 million in our example above is $50,000, the amount we needed in retirement in our hypothetical.”Rob Berger, Forbes.com
Moral of the story – you should end up in the same place regardless of which method you use.
Am I behind in retirement savings?
This is an interesting question, and actually quite hard to answer. If you are aiming for 25x expenses by retirement, only you know if you’re on track or not.
There is the common notion that if you haven’t saved a certain amount by a random age then you are behind, but I don’t 100% buy into this.
Investopedia highlights that there are specific savings targets using multiples of current income. This can be evidenced by the Fidelity.com chart below.
“If you are earning $50,000 by age 30, you should have $50,000 banked for retirement. By age 40, you should have three times your annual salary. By age 50, six times your salary; by age 60, eight times; and by age 67, 10 times. If you reach 67 years old and are earning $75,000 per year, you should have $750,000 saved.”Tim Parker, Investopedia
Then there’s the fact that the median retirement savings for a 45-54 year old is $56,722. While this is super alarming, it doesn’t completely tell the story. It also doesn’t quantify alternate methods of retirement savings like Real Estate, Cryptocurrencies, etc. So there is a chance this is artificially low. At the end of the day, you need to assess your own needs and save accordingly to reach your personal retirement goals. Don’t worry about what your neighbors are doing.
Assessing your retirement readiness
It’s not a terrible idea to get a second opinion. Saving for retirement is a big deal, and it’s understandable to want a second set of unbiased eyes. This is where the “fee-only Financial Advisor” comes into play. “fee-only” means the financial advisor will have a fiduciary responsibility to give you sound financial advice rather than sell you financial products. There is a VERY BIG difference between these two people.
The White Coat Investor, a personal finance blog that mostly caters to physicians, highlights the positive benefits of a “fee-only” advisor.
First steps going forward
Now that you’re armed with the information you need to make better choices, it’s time to review that plan and find the gaps (if there are any). Don’t forget, always pay yourself first!