Last month, we talked about the power of compounding interest and how it can super-charge your savings. Some of you were really encouraged that even though you don’t see a lot of progress right now, you’re building for exponential growth later. Others of you felt bad when you saw how much not saving when you were young cost you. Hopefully, that motivated you to start saving for retirement a little bit more seriously.
Saving for retirement is a big issue in the United States today. You may have heard talk of a retirement savings crisis in the news or on social media. It’s not all hype; 25% of Americans have nothing at all saved for retirement. That’s a real problem.
If you have nothing saved, you’re in the bottom fourth of Americans. But, what about if you do have savings? I’ll bet you’re curious to know how you match up to your peers. I’ll indulge you and give you some data.
Americans’ Average Retirement Savings By Age
The Federal Reserve’s Survey of Consumer Finances found that the average net worth of all US families is $692,100. Now, before you start feeling bad about that, remember that includes people like Warren Buffet and Jeff Bezos. A better number to look at is not the average but rather the median, or those in the 50th percentile. The median net worth of all US families is much lower than the average, at $97,300.
Now you’re probably feeling a bit better about yourself, right? That’s not a really good number to compare yourself to, though. Because of compounding interest and time, age makes a big difference when it comes to saving. The younger you are, the less time you’ve had to work and the less time you’ve had to have your money work for you. Accordingly, let’s break down the US median net worth by age:
Age 35 or younger: $11,100
Age 35-44: $59,800
Age 45-54: $124,200
Age 55-64: $187,300
Age 65-74: $224,100
Age 75 or older: $264,800
How do you compare?
Why Those Numbers Don’t Really Matter
The truth is, it's likely not wise to compare yourself to these numbers. Not only because Jesus teaches that we shouldn't compare ourselves to others, as I shared in my blog post about what Dave Ramsey gets wrong, but also because in this case, the average isn't likely to allow you to achieve your financial goals.
You see, just because having $12,000 at age 34 is above average doesn’t mean it’s going to get you a comfortable retirement. Let’s say you saved $1,000 a year since you graduated from college to get into that position. If you were to continue to do so, even earning 8% interest on your savings, you still would have less than $270,000 by the time you reach age 65. Now, how far is that going to take you?
If you entered the workforce at age 22, you probably should have much more than $12,000 saved by the time you’re 34. If not, you’re likely living beyond your means and should make a goal of saving more. You need to pick up the pace and hire a financial advisor to help you.
But that would look totally different if, say, you’re a doctor. Most 34-year-old doctors have a negative net worth because of student loans. If they are diligent, though, they usually have the income to power through those loans and save enough to surpass their peers by the time they reach retirement age.
Savings Guidelines Based On Income
These numbers are also significantly impacted by how much you’re making and spending. The more you’re spending, the higher your net worth needs to be in order to become financially independent and support the same standard of living in retirement. Fidelity has come up with some guidelines for how much you should have saved based on your income:
Age 30: 1x annual salary
Age 40: 3x annual salary
Age 50: 6x annual salary
Age 60: 8x annual salary
Age 67: 10x annual salary
While that is a bit more personalized, I still don’t think it’s sufficient. Comparisons are irrelevant and rules of thumb are too broad because they don’t reflect your personal situation; where you’ve been, where you are, and where you want to go in life.
How Much You Should Be Saving For Retirement
One of the most frequent questions I hear as a financial planner is "How much should I be saving for retirement?" While the common rule of thumb is to save 15% of your income for retirement, the real answer to that question is It depends on your own unique situation and goals.
As you saw last month, someone who starts saving at age 45 really needs to be saving a higher percentage of their income than someone who begins at age 25. Also, your ideal retirement will have a big impact on how much you need to save. If you plan on traveling the globe or retiring in Manhattan, your needs will be very different than if you plan on spending your retirement babysitting grandchildren in Oklahoma.
The best way to answer the question of how much you need to be saving is to sit down with a financial advisor who will help you address the big picture of what you want out of life and then piece together a plan to get you there. I can do that for you.
Often, though, it takes more than just a plan to get you where you want to go. You need a guide; someone who can provide you with accountability, objectivity, and technical expertise. I do that for my clients as well.
Whether you just want a plan so that you know the steps you need to take to achieve your goals or you want someone to walk with you and help you implement it, we should talk. Click here to schedule a free 30-minute phone call where we can discuss your unique situation, goals, and dreams.
About Wacek Financial Planning
Founder Ben Wacek is a fee-only Certified Financial PlannerTM and Certified Kingdom Advisor® who has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. If you’d like to learn more about Wacek Financial Planning, please visit www.wacekfp.com.
Photo by Tumisu from Pixaby.