When asked how much they should have put away in order to fund a comfortable retirement, a whopping 61 percent of Americans choose the answer, “Don’t know,” according to a new survey from Bankrate.
Another 8 percent under-estimate by a lot: They say that they’ll only need $250,000 or less, which is a fraction of the $1 million financial experts typically recommend. But even the 15 percent of respondents who say they’ll need between $250,000 and $1 million could be missing the mark as well, given that $1 million doesn’t stretch as far as it used to.
On average, respondents estimate they’ll need around $650,000, which could leave them broke in their old age. Older generations are more likely to give a lower number: Both boomers and those aged 73 and above say they’ll only need $500,000 in the bank for retirement. Those in Gen X predict they’ll need $1 million, while millennials say $800,000.
Not only are Americans failing to understand how much they need to put away for their golden years, they aren’t saving much, either. A Bankrate survey from March found that 20 percent of Americans don’t save any of their annual income at all.
Only 16 percent of survey respondents say that they save more than 15 percent of what they make, which is what experts generally recommend. A quarter of respondents report saving between 6 and 10 percent of their income and 21 percent say they sock away 5 percent or less.
Understanding how much money is necessary for a secure retirement is important. Although everyone’s financial situation is different, there are a few strategies you can use to figure out how much you’ll need.
According to retirement-plan provider Fidelity Investments, a good rule of thumb is to have 10 times your final salary in savings if you want to retire by age 67. Fidelity also suggests a timeline to use in order to stay on track:
- By 30: Have the equivalent of your salary saved
- By 40: Have three times your salary saved
- By 50: Have six times your salary saved
- By 60: Have eight times your salary saved
- By 67: Have 10 times your salary saved
You can also look at the 4 percent rule often used by early retirees, which states that, if you can safely withdraw four percent a year from your retirement savings portfolio, you have enough in the bank to quit your job.
Flipping the 4 percent rule can help you figure out how big your portfolio needs to be. To do so, divide your annual spending by 0.04 (or multiple it by 25) to get your target.
To know if you’re saving up enough to reach that goal, it’s crucial to calculate your savings rate, which will show you how close you are to the ideal of putting away at least 15 to 20 percent.
That rate can be determined using a simple equation: Divide the amount you saved last year by your gross income. That means if you earned a pre-tax salary of $50,000 and contributed $5,000 to a retirement account, your savings rate is 0.1, or 10 percent.
To make the most of your retirement savings, start by investing in your employer’s 401(k) plan, if there’s one available to you, and take full advantage of any company match, which essentially gives you free money.
If your company doesn’t offer a 401(k) plan, don’t sweat it: Other retirement savings vehicles can be useful tools as well. Both Roth IRAs and traditional IRAs offer tax benefits and should be considered as part of a diversified savings plan.
Read up on the differences between various retirement accounts here.
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