Mind the Retirement Gap

Mind the Retirement Gap

It’s an age-old question: How much is enough? As you reach certain milestones, it becomes obvious that retirement is fast approaching. Are you saving enough? It’s a good idea to review your savings at key checkpoints and find ways to overcome a possible retirement gap.

There are several ways to estimate whether you are on track to reach your retirement goal. While each person has unique savings needs, rules of thumb can give you a broad target to aim for. One measure to consider is the size of your savings in relation to your age and income.

Retirement experts estimate that at age 65, you should have saved an average of 11 times your final pay. However, studies show most workers will only save 8.4 times their final annual salary.1 That could amount to a shortage of well over $100,000 if your final salary is $45,000 a year.

Checkpoints Can Help Gauge Your Progress

Age Amount You Should Save Retirement Savings Target
(Making $45,000 annually)
35 1.4 x (annual salary) $63,000
45 3.7 x (annual salary) $166,500
55 7.1 x (annual salary) $319,500

Source: From the book, “Your Money Ratios: 8 Simple Tools for Financial Security” by Charles Farrell, 2011.

Coming Up Short?

If you’re missing your target, maxing out your company’s retirement plan can help get you on track. Here are few tips:

  • Some financial planners suggest you save 10 to 20% of your salary throughout your entire career.
  • If that’s too steep for your budget, try to save an additional 1% or more each year.
  • If your company matches your contribution, save at least enough to get the full match.

Joe makes $45,000 a year.What happens if he:

mind-the-retirement-gap_save-extra

He potentially earns:

 Mind the Retirement Gap - Earning

Source: American Century Investments, Standard & Poor’s.  

Play Catch-Up If You’re Age 50 or Older

At age 50 you may be able to put extra money, called catch-up contributions, in your retirement plan. The amount you can add depends on the type of retirement plan you have.

Catch-up contributions are designed to help make up for savings you may have missed when you were younger.

Catch-Up Contributions Can Boost Your Bottom Line3

 Mind the Retirement Gap - Catch-Up

Source: American Century Investments, Standard & Poor’s.  

Review Your Investment Choices

Having the appropriate mix of stock, bond and money market investments may play a vital role in improving your odds of reaching your goal.

  • Stock funds, while riskier, can potentially help your savings grow more.
  • Less risky investments, like bonds and money markets, can potentially help lower your risks of losing money when markets go up and down.

 

Find the right asset mix to help you reach your goal.

1 The Real Deal: 2015 Retirement Income Adequacy at Large Companies, Aon Hewitt, 2015.

2Hypothetical calculations based on an annual salary of $45,000, with $75 and $188 monthly investments respectively over 20 years at a 6% return rate. Assumes reinvestment of all gains, dividends, and interest and does not include fees, expenses, or taxes. If all taxes, fees, and expenses were reflected, the reported portfolio value would be lower. Source: American Century Investments, Time Value Calculator. ©2016 Standard & Poor’s.

3Hypothetical calculation of $1,000 annual investment over 15 years at a 6% return rate. Assumes reinvestment of all gains, dividends and interest, and does not include fees, expenses, or taxes. If all taxes, fees, and expenses were reflected, the reported portfolio value would be lower. Source: American Century Investments, TimeValue Calculator ©2016 Standard & Poor’s. The rules and amounts for catch-up contributions are set by the IRS each year. For workplace retirement plans, check with your employer to see what you are eligible to contribute.

Diversification cannot protect against loss in a down market.