Saving enough money for retirement is a major financial goal for many people. By age 55, experts recommend having at least 5-10 times your annual salary saved so you can retire comfortably around age 65-67. However, how much you need exactly depends on several factors.
How much income will you need in retirement?
A general rule of thumb is that you’ll need about 70-80% of your pre-retirement income to maintain your standard of living once you stop working. So first, estimate your expected annual expenses in retirement. Consider costs like:
- Housing – Will you downsize or stay put? What will mortgage/rent payments be?
- Healthcare – Medicare premiums, copays, dental, hearing aids, etc.
- Food, clothing, utilities
- Travel and entertainment
- Support for elderly parents or adult children
- Hobbies
Add up all your estimated expenses, and multiply the total by 80% to get your target annual retirement income. This gives you a retirement income goal to aim for.
When do you plan to retire fully?
The age that you retire fully will significantly impact how much you need to save. Retiring even a couple years earlier means your nest egg needs to fund a longer period of retirement. Make sure to consider:
- Full retirement age for Social Security benefits (age 67 for those born in 1960 or later)
- Age you’re eligible for Medicare (65)
- Any company pension or retiree health insurance benefits tied to a retirement age
- Desired retirement lifestyle and travel plans
It’s wise to aim for your full retirement investments to last at least until age 90. The average 65 year old woman now lives to age 87, and man lives to age 85.
What sources of retirement income will you have?
Next, estimate how much retirement income you can count on from sources like:
- Social Security – Check your annual benefit estimate at ssa.gov
- Traditional pension from an employer, if any
- Annuities or other reliable streams of income
Add up the amounts you can count on from those sources. Then subtract that total from your desired annual retirement income amount. The remainder is how much you’ll need to withdraw each year from your retirement savings.
Use the 4% rule
A commonly used rule of thumb is that you can safely withdraw 4% of your total retirement savings each year. So to determine the total savings target for a 55 year old:
- Calculate your desired annual retirement income
- Subtract out any income from Social Security, pensions, etc.
- Divide the remainder by 0.04
For example, say your target annual income is $60,000. You expect $20,000/year from Social Security. So you’ll need $40,000/year from savings. Using the 4% rule, you would need savings of $1,000,000 by age 55 ($40,000 / 0.04 = $1,000,000).
Account for inflation
One thing to remember is that costs tend to rise over time due to inflation. You’ll want your retirement savings to keep pace with rising prices. A moderate inflation rate of 2-3% per year can significantly decrease your purchasing power over a 30+ year retirement.
It’s a good idea to factor in inflation when doing your retirement calculations. You can either inflate your expected future expenses, or assume a lower “real” rate of return on your investments. For example, if you expect to earn a 6% return on your portfolio annually, you would reduce that to 3-4% after inflation.
Use online calculators
To estimate your target retirement savings, you can use one of these online calculators:
- Bankrate Retirement Calculator
- Charles Schwab Retirement Calculator
- Fidelity Retirement Calculator
- Vanguard Retirement Calculator
These tools allow you to input details on your current finances, future retirement expenses, and projected Social Security benefits. They will estimate both how much you need to save and what your savings balance should be at different ages leading up to retirement.
Aim to save 15% or more
As a general benchmark, you should strive to save at least 15% of your income for retirement every year after age 40. This includes any matching contributions from an employer retirement plan.
Saving consistently at this level (or more if possible), along with investment growth, will help provide the nest egg needed to maintain your lifestyle in retirement.
If you start saving later in your working years, you may need to ramp up to save 20-25% of your income or more. Take advantage of catch-up contributions to IRAs and 401(k)s as well, which allow those 50 and older to save extra.
Adjust investments as you near retirement
As you enter your 50s, it’s important to review your investment portfolio’s asset allocation. You’ll want to adjust the mix of stocks, bonds and cash to reduce risk as retirement nears.
A reasonable asset allocation guideline is to shift your portfolio to become more conservative as follows:
- Up to age 50: 80-90% stocks, 10-20% bonds
- Age 50-55: 70-80% stocks, 20-30% bonds
- Age 55-60: 50-60% stocks, 40-50% bonds
- Age 60-65: 40-50% stocks, 50-60% bonds
This helps protect your nest egg against a potential market downturn right as you enter retirement. Be sure to consult a financial advisor when adjusting your investments.
Accumulate savings in tax-advantaged accounts
It’s wise to build up your retirement savings using tax-advantaged accounts like 401(k)s and IRAs. This gives your money the benefit of tax-deferred growth over the years. Here are the 2023 contribution limits to be aware of:
- 401(k) – $22,500 per year, plus a $7,500 catch-up contribution if over age 50
- Traditional IRA – $6,500 per year, plus $1,000 catch-up
- Roth IRA – $6,500 per year, plus $1,000 catch-up
- Health Savings Account – $3,850 per year for individual, $7,750 for family, plus $1,000 catch-up
Have a diversified investment portfolio
To grow your retirement savings effectively, you’ll need to invest in a diversified mix that provides long-term growth while managing risk. This should include:
- U.S. stocks – Broad market index funds that track the S&P 500 and total U.S. stock market
- International stocks – Funds focused on foreign developed and emerging markets
- Bonds – A mix of U.S. government, corporate and municipal bonds
- Alternatives – Real estate and commodities to diversify further
Rebalancing your portfolio at least once a year keeps your asset allocation on track. You can reduce fees by using low-cost index funds and ETFs for core holdings.
Consider hiring a financial advisor
If you don’t feel confident managing your retirement investing and withdrawals yourself, don’t hesitate to hire an advisor. Look for a fiduciary fee-only advisor who is legally required to make recommendations in your best interest.
An advisor can help with key aspects like:
- Setting an appropriate investment strategy and asset allocation
- Selecting optimal investments and portfolio holdings
- Determining the best accounts to use – 401(k), IRA, taxable, etc.
- Minimizing fees, costs, and taxes
- Adjusting your financial plan to account for life changes
- Managing required minimum distributions at age 72
Even if you pay an annual advisory fee, the value they provide often more than offsets the cost.
Save early and consistently
The key takeaway is that saving for retirement should begin as early in your career as possible. Don’t wait until your 50s to start accumulating a nest egg.
Consistent saving and compound investment returns are your biggest assets when planning for retirement. Use the guidelines provided to determine your target savings amount based on your income, expenses and retirement timeline. Seek help from a financial advisor if you feel overwhelmed.
The more diligent you are about contributing to your retirement funds starting in your 20s and 30s, the easier it will be to hit your target savings by age 55. Monitor your progress each year, and make adjustments as needed to remain on track.
Conclusion
It’s essential to take stock of your retirement savings progress by age 55. This helps ensure you’re on pace to hit your savings target and achieve your desired retirement lifestyle. Use the factors covered in this article to calculate how much you should have saved.
With 10 or fewer years until retirement, you can’t afford to neglect your savings. Be proactive now in ramping up contributions, refining your investment strategy, and seeking professional advice if needed. Making smart money moves in your 50s sets you up for more retirement security and freedom.