Most of us know the basics. Save early. Contribute to your 401(k). Put something away every paycheck. That’s solid advice, and it matters.
But here’s what a lot of people never get around to doing, and it can leave you short even if you’ve been saving faithfully for years. Most people never set an actual savings target.
According to FINRA statistics cited in research on retirement readiness, 55% of Americans have never tried to figure out how much they actually need to save for retirement. That’s more than half of us going in without a number to aim for.
A Simple Formula to Find Your Number
Yes, there are unknowns. You can’t predict exactly how long you’ll live or what surprises might come up. But you can get a reasonable estimate, and that’s far better than no estimate at all.
One popular method is based on the 4% rule. The idea is that you can withdraw 4% of your savings in your first year of retirement, then adjust the withdrawal each year to keep up with inflation.
Here’s how the math works. Start by estimating what you’ll spend each year in retirement. Then subtract whatever you expect to receive from Social Security. What’s left is what you’ll need to cover yourself.
Multiply that number by 25. That gives you your savings target.
Here’s a concrete example. Say you expect to spend $70,000 a year in retirement, and you expect $30,000 a year from Social Security. That leaves $40,000 you’ll need to cover on your own. Multiply $40,000 by 25, and your target is $1 million.
Keep It Flexible as You Go
Your target doesn’t need to be perfect right now. It just needs to exist. Once you have a number, you can use a retirement calculator to see how your current savings are tracking and how much you’d need to set aside each pay period to get there.
It’s also fine to revisit the number over time. Your retirement date might shift. Your expected expenses might change. That’s all normal. The important thing is to keep your savings plan updated whenever anything changes.
The goal isn’t to get the number exactly right on the first try. It’s to stop flying blind. Having a target (even a rough one) puts you in a much stronger position than most people are in right now.