Retirement savings: When is enough enough?

Kim Last
Kim Last

You save for retirement with the expectation that at some point you’ll have enough to walk confidently away from work and into the next phase of life. But how do you know if you’ve reached that point?

Retirement calculators are useful, but only to a point. The problem is they can’t predict your retirement lifestyle. You might retire on 65 percent of your end salary only to find you really need 90 percent. That said, once you estimate your income needs, you can get more specific with some simple calculations.

 Let’s say you’re 10 years from your envisioned retirement date and your current income is $70,000. You presume you can retire on 65 percent of that, which is $45,500. But leaving things at $45,500 is too simple. Because of inflation, you won’t need $45,500, you’ll need its inflation-adjusted equivalent. Turning to a calculator, we plug that $45,500 in along with 3 percent annual interest compounded for moderate inflation over 10 years and we get $61,148.

Now we start to look at where this $61,148 might come from. How much of it will come from Social Security? If you haven’t saved one of those mailers that projects your expected retirement benefits, you can find that out from the Social Security website. On the safe side, you might want to estimate your Social Security benefits slightly lower given the long-run challenges Social Security faces. If you’re in line for a pension, your employer’s human resource people can help you estimate payments

Let’s say your Social Security and pension add up to $25,000. If you anticipate no other regular income sources, this means you need enough retirement savings to generate $36,148 a year if you go by the rule in which you drawn down your investment principal no more than 4 percent annually. This means you need to amass $903,700.

Of course, calculations can’t foretell everything. The same can be said for retirement studies. Aon Hewitt projects the average full-career employee at a large company needs 15.9 times his or her salary saved at age 65 in addition to Social Security income to sustain a standard of living into retirement. The study also notes the average long-term employee contributing consistently to an employer-sponsored retirement plan will accumulate 8.8 times his or her salary by age 65. That’s a big gap, but Aon Hewitt doesn’t factor in resources like IRAs, savings accounts, investment portfolios, home equity, rental payments and other assets or income.

The latest Fidelity estimate shows the average 401(k) balance amassed by a worker age 55 or older at $150,300. The Employee Benefit Research Institute just released a report showing the average IRA owner has an aggregate IRA balance of $87,668.

Retiring later might make a substantial difference. If you retire at 70 rather than at 65, you’re giving presumably significant retirement savings that might have compounded for decades five additional years of compounding and growth. That could be huge. Think of what that could do for you if your retirement nest egg is well into six figures. You’ll also have five fewer years of retirement to fund and five more years to tap employer health insurance. If your health, occupation or employer let you work longer, why not try it? If you’re married or in a relationship, your spouse’s retirement savings and salary can also help.

Can anyone save too much for retirement? The short answer is no. But occasionally you notice some good savers or millionaires next door who keep working even though they’ve accumulated enough of a nest egg to retire. Sometimes executives make a “golden handshake” with a company and can’t fathom walking away from an opportunity to boost their retirement savings. Other savers fall into a “just one more year” mindset. They dislike their jobs, but the boredom is comforting and familiar to them in ways retirement is not. But do they really want to work forever, especially in a high-pressure or stultifying job? That choice might harm their health or worldview and make their futures less rewarding.

How close are you to retiring? A chat with a financial professional on this topic might be illuminating. In discussing your circumstances, an answer could emerge.

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