Some things in life are fairly obvious, like the fact that most of us can’t see the nose on our own face and how sitcom laugh tracks all seem to sound the same.
But some things in life are not so obvious. like whether or not you’re saving enough to retire. The question in the title of this article seems to beg a fairly straightforward yes-or-no answer, but in reality, the answer is often more complex than that.
That’s because your answer to the question is highly individualized, as is the answer of a friend or family member—or anyone else facing retirement for that matter.
Financial advisors often offer figures based on averages. These figures tend to be based on the national cost of living and other factors like inflation and healthcare costs. Many websites offer retirement calculators to help guide you with a snapshot of what your retirement financial picture will look like, but that’s all they offer—a snapshot or ballpark figure. This is helpful, but what’s really needed is a fairly accurate number that can only be gleaned through a careful, introspective analysis of your entire financial and lifestyle picture—both now and in the future. This type of holistic approach will help answer questions about when you can stop working, an approximation of how long your money will last, and whether or not you’re saving enough.
1. Perform a lifestyle assessment
In life, there are wants and there are must-haves. If you’ve worked most of your life and have been socking away money for retirement, you likely have a good idea of items high on your bucket list and those that would be nice to have.
For example, suppose you’ve been dreaming of taking that seven-day Mediterranean cruise. The cost per person can easily run over $1,000 per person for ship passage alone. Factor in airfare, meals, entertainment, and gifts, and you can easily triple that number.
If you’ve concluded that you can live on $30,000 per year in retirement, then your one vacation already adds up to 10 percent of your annual budget.
Your health should also be an important part of your lifestyle assessment. Are you or do you plan to be physically active in retirement? The obvious benefits of regular exercise, as well as physical and mental fitness, are easily imaginable but difficult to financially quantify over time—especially when it comes to purchasing pricey exercise equipment or gym memberships.
2. Give the 25 rule a shot
This basic calculation is most effective during the last decade or so as you approach retirement, and works by taking your income and multiplying it by 25.
If you are making $75,000 per year, multiply by 25 and you get $1.87 million, give or take a few thousand, that you need to save for retirement. This number represents how much money you’ll need in retirement to maintain your current lifestyle. Theoretically, this can help provide you with a framework of how much you need to save monthly or annually to achieve your goals.
If you don’t have major overhead like a mortgage to pay off, you can estimate a lower number that you’ll need to live off of annually. This will result in you not having to save as much to reach your savings goals.
Remember, this is just an estimation. If you are receiving income from other sources on a predictable basis, you can subtract that income from your savings calculations.
3. Know where your revenue streams are flowing
To have an accurate picture of whether you are saving enough, you need to know exactly where revenue is flowing in and out of your retirement accounts. That means you should not find that you have a 401(k) account that you forgot about from a previous employer.
It’s also not a good idea to have a bunch of investment savings statements lying around unopened. You want to know how your IRAs and other investment accounts are performing, whether good or bad.
You may want to establish a monthly budget in writing so that you can visualize actual expenses and identify areas where you might be able to cut back or direct more investment contributions. Be sure to separate fixed expenses like housing, property taxes, and health insurance premiums from discretionary spending like entertainment, gifts, and travel.
Knowing how much you need to save for retirement requires due diligence on your part. Know how much income is moving in and out of your household, what investments are providing the best returns, and most importantly, how you envision living out your retirement and the activities you plan to participate in.