NerdWallet's Smart Money Podcast - Am I saving enough for retirement?

Episode Date: July 8, 2019

Here’s how to know if you’re saving enough for retirement — and what to do if you’re behind, or haven't even gotten started yet. Dayana and Sean explain easy steps to help you set aside a pot of gold to spend in your golden years.

Hello and welcome to NerdWallet's Smart Money Podcast, where we answer your real-world money questions in 15 minutes or less. I'm your host, Sean Piles, and joining me is my co-host, Dayana Yochum. Today we're talking about a topic that I really nerd out about, and it's retirement. Retirement savings, retirement planning, and do you have enough saved? And this is a topic you've been writing about for longer than I've been alive. Yeah, was that really necessary? Yes, I think it shows that you have expertise, skills, experience. Anywho, today's question comes from Allison M. She says, Dayana and Sean, I've been putting away 10% of my income into retirement for the past 12 years, but I'm not sure if I'm saving enough. Am I on the right track for a comfortable retirement? I think actually Allison

deserves a standing ovation. Saving consistently over 10 years and putting away 10% of her income, that's really quite an accomplishment. Yeah, agreed. Kudos, Allison, for actually thinking about your retirement and making sure you're trying to save enough because, in fact, fewer than 50% of all workers actually make sure they're on track for a right retirement including doing the math to make sure that's the case. Yep. People really love rules of thumb and in general the save 10% of your income one is a good one if you're worried about running out of money in retirement. I read an interesting statistic the Employee

Benefits Research Institute did a study, and it found that if you start saving 10% of your income in your mid-20s, you're 30% less likely to run out of money in retirement. So that's actually pretty comforting to hear, save 10% of your income and you really lower the chances of running out of money. But that said, there are a lot of other factors that determine how far your savings will go, but also the quality of life it's going to pay for in retirement. Right. And so in this episode of NerdWallet's Smart Money Podcast, we're going to talk about how much you need for your retirement and what to do if you're falling way behind in

your retirement savings. Okay, let's get one thing out of the way to start here, Dayana. I've heard that you need $1 million to retire comfortably, and that seems impossible. What's the truth here? As I said, people love rules of thumb, but even better are exact dollar figures. And for this, we can turn to Fidelity, which is a major brokerage firm and a retirement plan administrator. And they can give us an assist with something that's called the savings factor formula and what they did is they based this on your pre-tax salary and here's how the math works so

by age 30 your goal is to have saved the equivalent of one times your annual salary by age 35 your retirement account balance should be ideally be two times your annual income. And at age 40, you should have three times your annual income and retirement savings. Four times by the time you're 45, and six, seven, eight times by the times you're 50, 55, and 60. And finally, by the time you're 67, Fidelity recommends having ten times your annual salary set aside so you can retire with enough money to pay for your lifestyle until age 93 essentially. At which time you're brought to a hilltop and left there or are out of money. So this is all slightly horrifying. What Fidelity is saying is that if you're 35 years old

right now making 60k a year you're supposed to have a hundred and twenty thousand dollars in retirement And I have a feeling that very few have that actually in their retirement account. Yeah, so the sums that you just heard may seem like completely out of touch with reality, but here's how I think about saving for retirement. We're talking about a lifetime of savings, so you have a lifetime to save this money. So while you might not be able to hit those milestones earlier in your career, as the years go by, as you're earning more, you're going to be able to save more. That plus don't forget about compound interest.

Compound interest really provides a huge savings tailwind for people. If you're investing your money and maybe your employer is actually kicking in a match in your 401k plan, a lot of that is going to help accelerate that savings. Okay, that makes me feel a little bit better here. And let's pause for a moment while we let folks do their own mental math to see where they should be and maybe where they are right now. Do we have math doing music? For me, that's just screaming until it's over because I hate doing math. Okay, we've talked about some rules of thumb and some specific numbers here, but now let's help you see where you stand.

After all, you are a unique individual, and what you'll need in retirement depends on the kind of lifestyle you want. And there are four main factors that will help you determine how much you'll need to save for your golden years. The first one is your income, and the next is your planned retirement spending. Next you need to know your expected retirement age, so when do you want to stop working. And then finally, okay this morbid thoughts alert, your life expectancy. So we've just told you you need a lot of different inputs to figure this out.

We don't want to intimidate you and we do want you to run these numbers and we've made it easy. Guess what? We have a really awesome, actually handy dandy retirement calculator that crunches all of the numbers for you. Right. And we have a link to that at our show notes page at nerdwallet.com slash podcast. Good reminder.

All you need are three numbers, your age, your current income, and then how much you've saved. And what you'll get back is a snapshot of where you stand. Okay. All right, Allison, that should really help you get an idea of whether you're on track for the retirement that you want. But now follow up question here, addressing those who aren't going to do the math, don't have that much saved. What are you going to do if you're way behind on your retirement savings, like really behind? Me, for example, planning on having a fleet of caretaker robots when I'm old and decrepit, and they're going to be expensive. Yeah, you got to price that out. Right. So now we're talking about what we'll affectionately call the Hail Mary plan for saving for retirement when you haven't saved

a lot for retirement. And there are several things that you can do to help bolster your basically your retirement well-being. The first thing is really kind of just a psychological shift and it's start by redefining what you think retirement is going to be. So maybe it's not retiring when you thought you would. Maybe it's working to be. So maybe it's not retiring when you thought you would, maybe it's working several more years, or maybe it's working part-time in retirement, so basically slowing down. Doing those things is gonna give you a couple boosts

in that it will give you more years to save, more years for your savings to compound, but also it means that you're there are fewer years to have to cover with income in retirement. Another strategy is to tap the value of your house. If you have equity in a home, consider downsizing and then investing that freed up cash. Plus the lower housing cost will help you stretch your money in retirement. Yeah that's a really good one. Another biggie here in the Hail Mary plan

of saving for retirement is to delay taking Social Security. Most people are eligible to start taking the benefit in their early 60s, but you want to wait at least until you've reached full retirement age, which, if you're born after 1960, is age 67. A rule of thumb here, every year you wait past age 62 adds about 7 to 8% to your eventual benefit. So it's basically giving you a raise in retirement of 7 to 8%. I know what you're thinking. You're thinking, Social Security, Diana, it's not going to even be around when

it's time for me to retire. Likely, some system of social security will be in place. Plan on it not paying the same level of benefits to you as it is going to pay for me. Okay, Dayana, I think that about covers it. Let's get to our top three takeaway tips. All right, tip number one. Ideally, you wanna be saving 10% of your income. 15% is even better.

But think about it, if you're able to save 15% of your income right now, that means you're living on 85% of your paycheck. So you've gotten used to sort of a cheaper standard of life, right? So make that change now and the transition into retirement spending where you're going to maybe not be able to spend as much will be a lot more smooth. Right. Tip number two, even if you can't hit that number, try to have some savings beyond your retirement account.

For example, having an emergency fund can really help in case something breaks down like your caretaker robot or a furnace and that means you won't have to pull from your retirement when that happens. And even if you can just save enough for a few years of furnace, and that means you won't have to pull from your retirement when that happens. And even if you can just save enough for a few years of retirement, that can help you delay taking Social Security, as Dayana said, which is very important. Yep, and finally, run the numbers. Like we said, NerdWallet has a great retirement calculator that you can go to, and it will give you a snapshot of where you stand right now. But also you can play with the inputs and see if changing the date of your retirement or your savings level, how that improves the picture for you.

Thank you so much for joining us in this episode of NerdWallet's Smart Money Podcast. Have a money question of your own? Call us or text us at 901-730-6373. That's 901-730-NERD. Or you can email us at podcast at nerdwallet.com. And remember to rate us, review us, and subscribe wherever you're listening to this podcast. And a brief disclaimer to wrap things up for our lawyers here.

Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This information is provided for entertainment and educational purposes. Well said, Sean. Until next time, keep it nerdy!