By Scott Fischer, Senior Investment Consultant


When I meet with 401(k) participants, other than investment guidance, the #1 question I get is “how much should I be saving for retirement?” This is a subjective question and to everyone the answer could be different. It depends on many factors; however, the rule of thumb that most advisors use is between 10% and 15% of your paycheck.  I may use this as a blanket statement when addressing a group, but there are still lots of considerations that go into how much you should be saving for your retirement.

Age and time horizon are going to be some of the biggest factors. One of the benefits of investing for the long term is compound earnings. The longer you have money invested the greater the benefit of compound earnings.  If you start saving for retirement at age 25, you will likely benefit from the power of compounding much more thatsomeone who is starting at age 45. Not to mention you have 20 more years of saving that will benefit you. Therefore, someone who starts at age 25 and continuously saves $4,000 per year through retirement will have accumulated roughly $619,048 at age 65 using an average rate of return of 6%.  The person who waited till age 45 will have only accumulated $147,142 using the same assumptions. Therefor the 45 year old will need to save $16,837 per year to reach the same retirement goal. As you can imagine, it will be even worse for someone who waits till age 55 or later.

Your spending habits at retirement will also be a large factor to how much you will need to save to live comfortably.  People who have their mortgages paid off before retirement will need a lot less to live on in retirement than those who are still paying off their home mortgages. If you rent and plan to continue to rent, you will also need to factor that into your retirement planning goal.  I consider my personal situation and I could probably live on social security if it wasn’t for my mortgage, real estate taxes and home maintenance.  Luckily, I should have the home paid in full before I think of retirement, but the other items will still cost plenty each year.

The age of your children can also be factors. I know plenty of people who have had children later in life and though they are near retirement age, they are deferring retirement to make sure they can help put their children through college. This is actually a slightly different topic, but planning for your children’s college is something you should be starting at the child’s birth. Splitting the saving up over 18 years is much easier than coming up with tuition when your child starts college. Saving ahead of time also offers the benefit of compound earnings.

One of the largest concerns of retirement planning is the cost of health care. Most of us will need to pay for some coverage in retirement. Weather it’s just Medicare or you purchase an additional supplement, we can’t be certain how much the price of healthcare will go up before we retire.  Most of my financial plans are suggesting at least $6,000 per person per year at retirement, and the assumption of inflation is 6% per year!

What I would suggest to you and everyone that I speak with on retirement planning is that you must try to put a plan together. Then once you have a plan together, stick to it and continue the saving process and try not to get in a situation of needing to take money out of the retirement savings early due to a financial emergency. (See my blog on Short Term savings).  Going through a financial plan with a financial planner would be a good exercise. If this is something you wish to do, I would suggest you give me a call to discuss our planning services. Otherwise, my advice to everyone that asks me the question, “How much should I be saving for retirement?”  My answer, “As much as you can.”