When you are first starting out in your career, you tend to think of retirement as something far off. In the days of our grandparents, and even some of our parents, retirement savings wasn’t even an issue – many employers took care of that with company pension plans.
Find out now: How much do I need to save for retirement?
The Good Old Days
Four or five decades ago the ideal financial plan was to gain middle income paying job, work until retirement, and then be supported by the company funded pension plan. While this worked in the previous era, pension plans no longer rule the day. With more service type jobs instead of factory positions, employees no longer stay at one company for the full thirty or more years of their career. This means the responsibility of retirement savings has shifted from the company to the individual. However, this shift in responsibility has not necessarily come with more knowledge about finances. This means that when it comes to retirement many of us are lost, and unsure of exactly how much we should be saving.
Tallying the Target
According to William Baldwin of Forbes, there is a specific ideal formula that people should be following when it comes to retirement savings. Basically, someone age 35 should have at least 1x their annual income saved in their retirement accounts. By age 45, they should have 3x their annual income. Anyone at age 55 you should have 5x and at age 67 should have 8x their annual income. Using more specific salary incomes to help paint this picture, a person 35 years of age making $60,000 should have $60,000 already in the retirement savings. A decade later at age 45, assuming the income has remained the same for ease of calculation, this same person should have $180,000 in savings, at 55 they should have $300,000 and by 67 they should have $480,000. Of course, these calculations assume that income has not increased over a 32 year span, which is a bit unrealistic. The more likely scenario is that as you get older, your income will increase. As your income increases, it is assumed that your expenses increase, as well, and as a result so should your retirement savings.
The problem with the above calculations is that many of us do not have anywhere near this amount in retirement savings. Vanguard founder, John Bogle, has spoken out on a coming retiree “train wreck” caused by a lack of personal savings among Americans, underfunded pensions plans and an insolvent social security system. These three factors combined, spell a possible grim for future retirees, most notably for the baby boomers who have already begun to retire. The personal savings of this baby boomer generation has already taken a hit due to the economic downturn and financial crisis of 2007-2008. Much of the retirement savings lost in that period will take years to recover, years that many baby boomers do not have. Unfortunately, it looks like many baby boomers will be working longer than they ever thought.
No matter your age, it is important to understand where your retirement savings stand. Are you close to or near the savings numbers that Baldwin proposes? If not, it’s time to start investing more into our retirement funds. Make sure retirement saving is a part of your family’s budget. Cut out unnecessary costs. Weigh purchasing decisions in the long-term. Saving for retirement is now our own responsibility and the sooner you get started, the better.
Photo Credit: Premier Financial Planning IFA Bath