To Retire, I Need How Much?

Some retirement guides scare the daylights out of you. They contend you should have much more saved by now than you do. Sometimes, though, they miss crucial factors, so you shouldn’t be so alarmed.

Recently, I shared the chart below on my Facebook page and clearly struck a chord. This chart tells you how to calculate how much money to save for retirement based on your age and income level.

Source: JPMorgan

Taking a quick look at the chart, you might say, “I’m 35 and making $100,000, so I need to multiply $100,000 by 1.4. That’s $140,000 that I should have socked away already. No problem. Good thing I saved early and often.”

The rest of you? There’s a stomach knot of panic at already being so far behind in saving for retirement.

According to Vanguard’s latest study, “How America Saves,” the fund company’s median participant retirement account balance was $31,396 in 2013. The median participant age was 46, with an income of $75,000.

Now, according to the chart, those participants need more than $165,000 socked away already. That’s a difference of more than $130,000 – and evidence of serious disconnect between where the financial planning community says people should be and where those people actually are in terms of preparing for the golden years.

In the real world, we see most people still struggling to save for retirement. A new study from the National Institute on Retirement Security reports that the median retirement account balance for households nearing retirement is $14,500; almost two out of three working heads of households (62%) ages 55 to 64 hold retirement savings worth less than one year of annual income.

Yet JP Morgan’s calculations claim that anyone making more than $50,000 a year ought to have at least three times their annual income saved for retirement by age 55.

Conventional wisdom holds that you’re supposed to save $1 million or even $2.5 million for retirement. Numbers like this can dishearten you, but buck up. While having either of these amounts likely sets you up for comfortable post-working years, no set money number applies to everyone’s retirement.

Source: iStock

Source: iStock

The real issue with retirement savings in America is the constant bombardment of large savings goals that we must reach to retire comfortably. In frustrated response, as many as a third of us save nothing.

When researching my book You Can Retire Sooner Than You Think, I found that retirees who call themselves happy had at least $500,000 in retirement savings. Ultimately, though, how much you need to retire really depends on how much you need for spending each year after you stop working.

JP Morgan’s chart says that if you currently make $400,000 a year while working, at age 65 (and presumably the beginning of your retirement) you ought to have $6,640,000 in your accounts. That figure presupposes that during retirement you’ll still need 80% to 90% of that $400,000 a year for the rest of your life.

The chart seems to miss that with luck you’ll own most of your larger assets outright – such as your home, car or boat – when you retire. If that’s the case, needing such a high percentage of your peak career income year after year for comfort in retirement seems unlikely. You may not need that $6.64 million saved before retiring.

I wish planning for retirement was as simple as following a chart. Instead, it’s better you actually know how much you plan on spending per year after you stop working. From that determination, create your own retirement salary. (Try one of my favorite retirement calculators.)

Don’t panic at shotgunned totals regarding your nest egg, which will come with its own twists and turns. Personal finance is never as simple as looking at one chart.

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Wes Moss, CFP, is the chief investment strategist for Capital Investment Advisors and a partner at Wela, both in Atlanta. He hosts “Money Matters,” a live financial advice show on Atlanta’s News 95-5 and AM 750 WSB Radio. In 2015 and 2014 Barron’s Magazine named him as one of America’s top 1,200 Financial Advisors. His newly released book, You Can Retire Sooner Than You Think published by McGraw Hill, is available on Amazon, iTunes and at your local bookstore.

Wes writes weekly about personal finance in the “Bargain Hunter Section” for AJC.com, the site of The Atlanta Journal-Constitution. Wes is also the editor and writer for About.com’s Personal Finance blog. Connect with Wes on Twitter at @WesMoss365 and on Facebook at Wes Moss Money Matters. You can also visit his website, WesMoss.com to learn more about Wes, and take his complimentary Money and Happiness Quiz.

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