A national financial services firm has featured "What’s Your Number?" in an advertising program. People are shown with figures like $812,000 or $1,260,000 or $1,925,000 floating over them. These numbers represent a lump-sum figure the person should have accumulated before they can comfortably retire.
There Are Many Ways to Calculate Your Retirement Number
Other firms tout similar approaches by calculating a factor of your final income before retirement. For example, AON Hewitt, a major employee benefits provider, suggests that 11 times your final salary is a good lump-sum target. So if your final salary is $75,000, you should have a retirement portfolio of $825,000.
Fidelity Investments uses the same approach to come up with a number of eight times your final salary, with the following benchmarks along the way:
- 1 times your salary at age 35
- 3 times your salary at age 45
- 5 times your salary at age 55
Fidelity says that this can be achieved by a 25-year-old who starts saving 6% of his income and increasing his savings rate 1% per year for six years, and then maintains a 12% savings rate thereafter. Procrastinate between the ages of 25 and 45 and The Center for Retirement Research at Boston College reports that you would need to start saving about 33% of your income. Ouch! Calculating such a lump sum requires a complicated series of steps and the results are highly sensitive to many assumptions. Therefore, the majority of people never try to answer the question, "What's your number?" Not to mention that calculating a huge lump-sum number discourages many people and makes them feel like retirement planning is a futile exercise.
"Calculating a huge lump-sum number makes many people feel like retirement planning is futile."
A 15-Minute Retirement Planning Solution
But there is a simpler solution! What percentage of your income did you save last year? This is a much simpler calculation that can be done in 15 minutes or less.
Step 1. Calculate your total taxable employment income using your W-2 wage form or income tax return.
Step 2. Add up the dollars you contributed to your retirement plan, including employer contributions, from your December 31 retirement plan statement. Do not include Roth 401(k) or Roth 403(b) contributions since they are included in Step 1.
Step 3. Add up the dollars you added to or withdrew from other savings and investment accounts or accumulated in or depleted from your bank accounts during the year (the change in your bank account balances from beginning of year to end of year, up or down). This sum may be a positive or negative number.
Step 4. Add Step 1 and 2. This is your total income including employee and employer retirement plan contributions.
Step 5. Add Step 2 and 3. This is your total net contributions to savings.
Step 6. Divide Step 5 by Step 4. This is your savings ratio!
This is much simpler than estimating future income and expenses to calculate a lump sum number as a retirement goal. Your savings ratio should be 10% to 25%. It should be at the higher end of that range if you are older and if you are a high-income person.
Don't despair if it is less than 10%. Get on track for a successful retirement by increasing your savings rate as best as you can, even if only slowly and steadily.
Calculate Your Savings Ratio and Create Peace of Mind
Calculate your savings ratio today and every year and give yourself the peace of mind of knowing you are on the right path to a secure and comfortable retirement!
About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.