Retirement Saving Benchmarks

[Anonymous]

So many websites provide benchmarks for retirement savings, such as you should have 3x your salary saved at age 40, 6x at age 50, etc. In the DC area, incomes are high compared to most of America. And if you can move to a lower COL area in retirement, is this model truly relevant? There must be other assumptions that go into this advice.

How can I figure out if I am on track with my retirement savings (aside from hiring an advisor)?

[Anonymous]

An advisor is not going to tell you this either..

A good rule of thumb (assuming you are retiring at 65) is to have 25X your annual spend (the year you will retire) in savings (or 4%). The assumption is that it will last you at least another 25 years even if your net worth grew just enough to keep up with inflation.

This will automatically take care of the reduced spend associated with a LCOL area.

[Anonymous]

The financial advisors will always tell you what you have saved is not enough. I have saved 16 times income (if you exclude the 60k my husband and I put in each year into our 401k). My husband is 55 and I am 50.

[Anonymous]

Anonymous wrote:An advisor is not going to tell you this either..

A good rule of thumb (assuming you are retiring at 65) is to have 25X your annual spend (the year you will retire) in savings (or 4%). The assumption is that it will last you at least another 25 years even if your net worth grew just enough to keep up with inflation.

This will automatically take care of the reduced spend associated with a LCOL area.

DP: I use a combination of my income benchmarks and 25x my intended spend. It's very easy to think it will be much cheaper in a LCOLA but it's not always the case. We used to live in a LCOLA and some things were much cheaper, but travel, for instance, cost more because we'd have to fly regional to get to a major airport and work out parking/taxis etc. In retirement where we intend to travel more this could add up. Likewise, grocery stores were further away--now I can get 95% of what I need from Costco which is less than it cost to shop in the local grocery store in a LCOLA even though food costs were supposedly cheaper there on average. We also drove a lot more--which resulted in more gas and more wear and tear on cars.
My parents are in a LCOLA and have found for some medical things they need to go to a further away hospital which involves staying hotels etc. even for outpatient.

It's also hard to anticipate how things like your health care costs, home services and travel/entertainment will go up even if you don't move, whereas it's relatively easy to figure out what you won't have to pay anymore (e.g., mortgage, work expenses). Using your income as a benchmark can be helpful to just confirm you're not assuming you are going to want to live on so much less. Note the Fidelity income benchmarks for instance only assume you will spend 45% of your ending income in retirement from your retirement assets and that the remainder will come from SS and not having to save 15% of your income for retirement. But for high income people, ss won't replace nearly as much.

https://www.fidelity.com/viewpoints/retirement/how-much-do-i-need-to-retire

[Anonymous]

Anonymous wrote:The financial advisors will always tell you what you have saved is not enough. I have saved 16 times income (if you exclude the 60k my husband and I put in each year into our 401k). My husband is 55 and I am 50.

Our financial advisor tells us we're good. If I exclude the amount we are putting into our kids' college fund and retirement contributions. we will have 16x our HHI.

Your savings should be based on your expenses, not necessarily your HHI.

The kids will also be in college when we retire, so our expenses will go down - utilities, food, gas, but since we plan on retiring before 65 we will have to pay for private insurance, which yes, I know, is expensive. We've had private insurance for many years. Most of the kids' expenses (room and board) will be paid out of their college fund, and they are planning to get PT jobs in college to pay for their extras.

[Anonymous]

Great question. I just read an article that said at my income (300k) I should have 6.2 times my salary saved at age 45. I’ve always been a diligent saver and I’m not even close to that number.

[Anonymous]

Get your hands on a copy of Charles Farrell's "Your Money Ratios."

He has ratios for how much you should save for a "gold" vs. "silver" vs. "bronze" retirement. He doesn't like to just focus on the "ideal" scenario b/c there are people who can't get there based on when they are starting or what they have/haven't saved to date. He talks about how each area of your finances will affect the others (ie.... debt, retirement, etc.)

It seems like you, OP, would prefer a more nuanced viewpoint, and I think this book would allow you to customize your planning while also seeing what is affected by those customizations.

You can easily find this book on ebay or at your library.

[Anonymous]

how come all these tools are income based not spending based?

[Anonymous]

I think once you get to high HHI's the benchmarks no longer apply. I make 400K, I don't need 400K annually when I retire. I need like half, even less than half that.
We are calculating our retirement number based on expected annual spend once we retire, with an expectation that we will live to 90.

[Anonymous]

Anonymous wrote:how come all these tools are income based not spending based?

There are plenty that are spending based--rules of thumb like the average person spends 85% of their final income in retirement. But if you are 32 years old it's a bit hard to project what you will be spending when you are 70, so income benchmarks --based on average patterns--along the way are easier.

[Anonymous]

Anonymous wrote:

Anonymous wrote:An advisor is not going to tell you this either..

A good rule of thumb (assuming you are retiring at 65) is to have 25X your annual spend (the year you will retire) in savings (or 4%). The assumption is that it will last you at least another 25 years even if your net worth grew just enough to keep up with inflation.

This will automatically take care of the reduced spend associated with a LCOL area.

DP: I use a combination of my income benchmarks and 25x my intended spend. It's very easy to think it will be much cheaper in a LCOLA but it's not always the case. We used to live in a LCOLA and some things were much cheaper, but travel, for instance, cost more because we'd have to fly regional to get to a major airport and work out parking/taxis etc. In retirement where we intend to travel more this could add up. Likewise, grocery stores were further away--now I can get 95% of what I need from Costco which is less than it cost to shop in the local grocery store in a LCOLA even though food costs were supposedly cheaper there on average. We also drove a lot more--which resulted in more gas and more wear and tear on cars.
My parents are in a LCOLA and have found for some medical things they need to go to a further away hospital which involves staying hotels etc. even for outpatient.

It's also hard to anticipate how things like your health care costs, home services and travel/entertainment will go up even if you don't move, whereas it's relatively easy to figure out what you won't have to pay anymore (e.g., mortgage, work expenses). Using your income as a benchmark can be helpful to just confirm you're not assuming you are going to want to live on so much less. Note the Fidelity income benchmarks for instance only assume you will spend 45% of your ending income in retirement from your retirement assets and that the remainder will come from SS and not having to save 15% of your income for retirement. But for high income people, ss won't replace nearly as much.

https://www.fidelity.com/viewpoints/retirement/how-much-do-i-need-to-retire

I'm the PP you responded to.. It is good to measure yourself against multiple standards as you seem to do (I do as well). Just wanted to start off OP with the most straightforward and most widely accepted metric out there.

I also use a few other income-based models - Fidelity, Millionaire Next Door and another source that I don't recall. Fidelity says that you should have 1X income by 35, 3X income by 45, 5X income by 55 and 8X income by 67. I break this down by year - For example, fidelity is 5X at 55 and 8X by 67, that's about 0.25X each year so 56 would be 5.25X, etc.

The other source (that I don't recall) has the same concept but a bit more aggressive - 4.5X at 45, 7.5X by 55 and 12X by 67.

Millionaire Next Door - Average Accumulator of Wealth (Age*Income/10) and Prodigious Accumulator of Wealth (which is 2X AAW). The PAW model is the most aggressive model out there. If you can keep up with that you should be good.

I also use a more conservative 33X benchmark for my personal expense-based model with a goal of 50X in expenses over the next 5-10 years.

[Anonymous]

Anonymous wrote:

Anonymous wrote:The financial advisors will always tell you what you have saved is not enough. I have saved 16 times income (if you exclude the 60k my husband and I put in each year into our 401k). My husband is 55 and I am 50.

Our financial advisor tells us we're good. If I exclude the amount we are putting into our kids' college fund and retirement contributions. we will have 16x our HHI.

Your savings should be based on your expenses, not necessarily your HHI.

The kids will also be in college when we retire, so our expenses will go down - utilities, food, gas, but since we plan on retiring before 65 we will have to pay for private insurance, which yes, I know, is expensive. We've had private insurance for many years. Most of the kids' expenses (room and board) will be paid out of their college fund, and they are planning to get PT jobs in college to pay for their extras.

This 16x HHI calculation is interesting to me, primarily because using a conservative estimate of 5 percent annual growth in our investments (which are about 100 percent in equities now), at our current savings rate, we're on track to have 23x HHI by the time we retire. And yet I always assume we're saving just barely enough! I suppose I'm possibly being over-conservative now...

[Anonymous]

(I'm the immediate PP; that's 23x gross HHI, I see others are using HHI minus retirement savings contributions. Maybe I'll... think about spending more on vacations next year.)

[Anonymous]

Anonymous wrote:(I'm the immediate PP; that's 23x gross HHI, I see others are using HHI minus retirement savings contributions. Maybe I'll... think about spending more on vacations next year.)

Depends on income.. Is this HHI at the time of retirement or current HHI? If at time of retirement, it is very high unless you plan on spending a lot more in retirement.

[Anonymous]

Anonymous wrote:

Anonymous wrote:(I'm the immediate PP; that's 23x gross HHI, I see others are using HHI minus retirement savings contributions. Maybe I'll... think about spending more on vacations next year.)

Depends on income.. Is this HHI at the time of retirement or current HHI? If at time of retirement, it is very high unless you plan on spending a lot more in retirement.

Oh, good point. Current HHI. Not sure I'm expecting dramatic increases in HHI other than roughly keeping up with inflation over the next 15-20 years, but I guess we'll see.

We made a ton of money selling our previous house for more than twice what we'd paid for it and invested most of the cash, after putting 20 percent down on our current home, so having that in the market for 25 years should wind up being good for us. Our financial advisor seems to think we're well on track.

We spend plenty of money, so I don't want to oversell how conservative I am, I just have a hard time pouring cash into stuff that feels like a splurge.