Want to Retire Confidently? Set A Retirement Savings Target

It’s no wonder that many people fall short with retirement savings. They have no idea what they need. It would be impossible to know if you are on track without having a retirement savings target to shoot for. People tend to fall into three categories when it comes to retirement savings. The confident, the worried, and the clueless. One way or another, retirement will eventually happen to everyone alive. Wouldn’t you prefer to know you’re doing everything you can for a better retirement?

Cluelessly entering into retirement should be the last thing anyone wants. Moving from the clueless to the worried class of retirement preparedness is a necessary step in the right direction. A little fear can go a long way in lighting a fire under one’s keister to take positive action. For retirement confidence, the sooner you set your retirement savings target the better.

Sadly, Too Many Are Clueless About Their Retirement Savings Needs

Want to Retire Confidently? Set A Retirement Savings Target

The recent Merrill Lynch/Age Wave study results clearly shows that people don’t know how much money they need to save for their retirement. For people age 50 and older, only 27% felt prepared financially for funding their retirement for 10 years. Worst than that, 81% didn’t know how much they needed saved to fund their retirement.  

This isn’t just an American phenomenon. In Great Britain the Pensions and Lifetime Savings Association found similar findings in their studies. They found that 78% didn’t know whether their retirement savings were on track to meeting their retirement funding needs.

Setting A Retirement Savings Target

There are a lot of calculations and unknowns that come with retirement planning. Certainly seeking help from a trusted Certified Financial Planner should be considered. Below is a basic and simple approach to finding a base. This base should be considered only the lowest retirement savings target to shoot for.

Step 1- How Much You Will Need

The first order of business in setting your retirement savings target is knowing how much income you need to pay for your essential living costs. Think housing, utilities, grocery, transportation, and insurance. Get intimate with your budget. Figure out your minimum lifestyle needs. Based on that amount also add to it a proper percentage for taxes.

Step 2- Inventory Your Guaranteed Retirement Income

Next is listing all anticipated guaranteed retirement income like Social Security or other government pension scheme. That also includes any work related pensions you have or will earn. This will require requesting a current estimate of your future benefits and at what age you will be eligible for the benefit.

Step 3- Determine The Amount Your Retirement Savings Must Cover

Now subtract from your essential living costs the guaranteed retirement income amount you will receive. This result is what will be used to set your base retirement savings target. The target is the estimated amount you need your retirement savings to fund your lifestyle essentials.

Step 4- Calculating Your Base Retirement Savings Target

The final calculation is using the much discussed safe 4% retirement withdrawal rate. It isn’t as favored as once was. But it allows a simple equation for setting our minimum retirement savings target. Simply multiply your funding figure by 25. This result is the amount you should set as your minimum retirement savings target.

Example: Monthly base essential living cost $2500 – Social Security $1200 = $1300 X 12 months = $15,600 a year X 25 = Base Retirement Savings Target $390,000.

If you plan on retiring before you begin receiving any guaranteed retirement income then make sure the amount needed during your early retirement years is added in to your target amount.

This is an Estimated Base Retirement Savings Target and Not Gospel

Congratulations, you have just figured out your scrape-by retirement savings target. Understand that whatever you come up with in this calculation that you should save much more. It only used essential living costs. There are many unknowns that we will face in retirement. One-time large financial hits occur throughout our lives and will do so in retirement. Healthcare, inflation, and even our longevity are unknowns that must also be accounted for.

We should also include wanting to save for more than just living essentials and add some fun in our retirement. The above approach is only the closest savings target to hit. Other savings targets should be set beyond it to aim for. Get into the practice of running your numbers through a good retirement calculator as you go. It will help you to fine-tune your retirement savings target. Then it’s all about saving and investing as much as you can to meet it and beat it.

What To Do If Your Base Target Amount Will Be Missed

When your best savings efforts isn’t going to be enough then hard choices must be made, and the sooner the better. If savings targets will be missed under your current situation and future projection then consider doing anything you can to cut your essential living costs.

There’s frugal living, downsizing your home and lifestyle, debt elimination by any means, planning on relocating to a less expensive place in retirement, etc.

Anything that can be done long before retirement will mean freeing up more money to allocate toward retirement savings. It also reduces your target savings amount needed. Last but not least is delaying your retirement for as long as you can. IF YOU CAN.

Missing the target means figuring out how to live on only your Social Security and/or other pension scheme for what could be a 30 year or longer retirement..

It is Always Better To Be Informed

When it comes to retirement, keeping one’s head in the sand thinking ignorance is bliss is a huge mistake. So is the often “I plan to work until I die” retirement plan. Many people end up retiring earlier than they planned due to job loss, health reasons, or having to care for a family member.

The simple scrape-by retirement savings target calculation moves us from clueless to worried status. But taking positive steps forward based on knowledge, preparation, and action reduces fear. It gives us a chance to correctly save and track progress for our inevitable future. Once we can see that we are on our way to meeting even our base retirement savings target we can have the peace of mind that comes with any level of retirement confidence and hopefully long before we retire.


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8 thoughts on “Want to Retire Confidently? Set A Retirement Savings Target

  1. I’ve been retired for a couple of years and had verified I had more than enough when I pulled the trigger on the early side of conventional retirement age. However because I wasn’t sure I really wanted to leave full time employment for good I set up some consulting gigs, part time, that kept my brain, my brand and my options fresh just in case. So far they’ve been paying 100% of my family’s expenses working a couple of days a week or less but also letting me groove in to a life that is more leisure than work. I’d highly recommend staying at least on the fringe of your former career if possible until you have proved to yourself that you are happy to leave it behind. Plus no matter how much you have saved up it is kind of fun to not withdraw it and instead just watch it grow!

    1. Thanks for the comment Steveark. I agree with you 100%. I did the same, at least the first several years of my early retirement. I leveraged the skills from my first career to start a successful encore career. Meeting retirement savings targets allows us to work when we want, doing what we want. Like I go on about, its the absence of needing to work that defines retirement.
      Tommy

  2. Great post!

    I’m glad you mentioned all of this is not gospel. I’m not quite comfortable with the 4% rule. I’d shoot for 3 or 3 1/2 but I’m conservative. Also, taking Steve Ark’s point into consideration, some of us might not be able to go back to work too easily if we were generalists, and not specialists — or if we don’t have any interest in ever doing the same work again, like me. I may end up cultivating some new side gigs for fun. We’ll see!
    Mrs. Groovy recently posted…Don’t Tell Me You Can’t Get InspiredMy Profile

    1. Thanks for the comment Mrs. Groovy. I really don’t think the 4% rule is still safe either. Especially the aspect of automatically adding the rate of inflation to it each year. Using the 4% rule just allowed me to use a factor of 25 to settle on a target amount. This post was an attempt to provide a simple start to setting a target and in no way is it meant to represent a sure deal. It’s a start to do something positive toward retirement saving goals for those who have no idea how to start. It is also a pure minimum target for having enough to scrape-by which is better than nothing but shouldn’t be the dream happy retirement savings target. Steveark mentioned he has kept a foot in his career since retiring early. I think that is key in being able to continue working in your old field if you want to. Myself, I preferred to instead make a career change.
      Tommy

  3. I completely agree with you. I hear a lot of people say “I am always going to work” or once I get to SS I will be fine. Not having a target (and a realistic one) is risky. I personally think I will always have a side gig, not because I have to but because I want too. However, I am saving as if the side hustle didnt exist.
    Eric Holland recently posted…Frugal Lessons Learned Searching for RocksMy Profile

    1. Thanks for the comment Eric. I think the work till I die retirement plan fails almost all of the time. Meeting a retirement savings target has to be a priority. I believe that retirement is changing in definition to where some sort of paid work will be welcomed but shouldn’t be depended on for obvious reasons. I have been preaching retire early and often since 1998.
      Tommy

  4. Definitely an important thing to do. I bet many people are too busy with life and dont start to get serious about it till after they turn 50. I think its an important exercise to go through and will really open peoples eyes as to what adjustments they need to make. You need to understand what your range of possibilities and outcomes are regarding your savings rate. Its good to build an extra buffer into your numbers also. Like you mention, there is a good chance some major unexpected expenses will happen. Not $500, but possibly $5000 and up. Thats not good if you have a family and plan on living on $20K or $25k a year. Initially, I’m shooting for a 3% withdraw rate plus some part time work as long as it makes sense even if I dont have to. Over the longer term, the portfolio should take over and the part time gig won’t matter quite as much.

    1. Thanks for the comment Arrgo. The post was inspired by the lack of retirement preparation a couple of age 50ish folks I recently spoke with and then found collaborating evidence identified in the study results that it’s a big problem. I thought at the very least seeing a scrape-by bare-bones only savings figure could help see why this should be everyone’s priority. You are right, life seems to get in the way until we get older and our future is within view staring right at us.
      Tommy

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