I firmly believe the question “Am I saving enough for retirement?” is the single most popular question in financial planning. On the one hand, it is ultimately unknowable unless you can state with perfect confidence how long you will live. But on the other hand, the tools needed to construct a very reasonable estimate are actually quite straightforward.
Enter Pete’s Retirement Savings Calculator. This is a safe place to play around with different scenarios as you consider how you would answer the eternal “am I saving enough” question. What would be the effect if I save more? Or work longer? Or retire early? Are my expectations about how my investments will perform reasonable?
This is not a “one and done” exercise. Do it now, but then repeat the exercise in six months or a year, perhaps after you have made some adjustments to your plan based on what you learned today. And then do it again regularly, at least once a year, as your circumstances change and, importantly, as your vision of retirement starts to come into focus. The answer to the question of “enough” is not just the dollar amount that you have saved, but what your expectations and goals are for retirement. And that may change over time.
Ready to start?
How much have you saved for retirement?
This is simply the total of the balances today in your workplace retirement account (401(k), 403(b), and similar) and IRA accounts (Traditional and Roth). If you are saving for retirement in a different type of account also, you can include that as well if this is truly money that you have set aside for no other purpose than retirement. If you have a pension, that’s great — but that is not part of this calculation. At a later point in your planning when you compare your projected income to your expected expenses, you will consider all of your sources of non-employment retirement income (pension, Social Security, annuity, etc.).
How much more do you plan on investing annually?
This is the dollar amount that you are contributing right now to your retirement account(s) each year. You may also have a matching contribution from your employer, however for the purposes of this exercise I prefer to use only the amount that you are putting in yourself. You will be projecting your retirement savings over many years; will you always have this match?
This is the single most important variable in this calculation because it is the one that you have full control over. A good rule of thumb is to shoot for saving between 12% and 18% of your annual gross income for retirement. Why such a broad range? Well, some people start saving later than others. And we all have different expectations of what we will need for our lifestyle in retirement. It is a good practice to commit to increasing the percentage that you save towards retirement each year until you reach the point where you feel confident that you will meet your goal. That is what this calculator can reveal.
How many years until you retire?
Depending on how old you are when you are completing this exercise, you may or may not have a firm idea of the answer. And your view of what age you would like to retire may change over the years. Maybe early retirement will become the goal (or the necessity). But if you do not have a specific idea in mind, entering your Social Security full retirement age is an excellent start, either age 66 or 67 if you were born in 1960 or later.
Expected rate of return.
Over the last 30 years or so, a balanced portfolio of 60% stocks and 40% bonds has had an average annual return of about 9%. Perhaps because you are on the young side, your own portfolio may be weighted differently and right now you may be experiencing a higher return. But remember: our goal today is to project out over many years. Over time, you will likely shift to a more conservative allocation of assets. Similarly, if you are close to retirement age, you may be invested more conservatively and may want to use a lower expected rate of return.
But what you should not be tempted to do is this: If your results at the end of this exercise show you are falling short, do not plug in a higher expected rate of return until you get to a number that solves your shortfall. You may or may not agree with 7%, that’s fine. But do be realistic and thoughtful in your assumption.