Ask Money

How’m I doing with retirement savings

Chris Farrell May 16, 2011

Question: Hi Chris- I heard the Marketplace Money episode on money issues at various stages of life and it has left me wondering about my own situation. I’m turning 40 at the end of this year and I’ve been wondering how to gauge my progress towards retirement. When I’ve searched on retirement savings benchmarks this is the first one that Google comes up and, frankly, I find it a mixture of distressing, absurd, and an interesting historical note of how optimistic people were in 2007.

The idea that I could have 1.6x my salary at 35 and then have 3.5x(!) my salary by the time I’m 40 seems absurdly optimistic. I currently have somewhere between 2 and 2.2x my salary in a mix of both pre and post-tax retirement savings accounts. I am currently savings 8% of my pre-tax salary, my employer adds 4.5% and I contribute the maximum $5k per year into a Roth IRA. I feel like I’m doing all I can to save for retirement but I feel like it just isn’t going to be enough. My wife thinks I’m a bit obsessed but, then again, she refers to her retirement savings as ‘the black hole’ (money that she puts in and it never seems to amount to anything). The challenge with this level of retirement savings is that it doesn’t leave much room for other savings, like college (18mo. old and another on the way this fall) or channeling money into other, more flexible savings vehicles that could be spent on child care or possibly private school if we can’t get into one of the decent charter s schools in our area.

So, my question has multiple parts- what can I use as a benchmark to tell if I’m on track for retirement? And at what point am I better off not putting money into post-tax vehicles like a Roth IRA and putting the money into something that is more flexible? Thank you very much for your thoughts. Al, Philadelphia, PA

Answer: First of all, without even running the numbers I can tell you’re doing well saving for retirement. Those are reasonable percentages of income going into your 401(k) and IRA. There is no magic number, no simple formula, no one calculator for answering the question “how am I doing” when it comes to retirement saving. How much money we’ll really need to live well when we’re old is unknowable.

Still, most people should find themselves in decent financial circumstances with room for maneuver late in life by following some basic savings strategies, taking a broad perspective on investment, and working longer than the traditional retirement age. It seems to me that’s what you’re doing.

Here’s how I look at most retirement calculators. It’s simply a snapshot. The information is useful, but, much like a stock’s price/earnings ratio, it’s only an indicator and shouldn’t be taken too literally. I’ve written several posts on retirement calculators, including here, here, and here.

By the way, you might buy some piece of mind by finding a fee-only financial planner to go over your household finances and give you some feedback and advice.

To your second question I am a fan of building up non-retirement savings. Don’t get me wrong. It’s important to fund the retirement savings plan at work or the IRA at home. It’s the financially prudent thing to do–as you’re doing. But savings also should be geared toward funding transitions over a lifetime. Retirement is only one of those shifts in activity, although it’s a major one.

Saving isn’t about old age. Saving should be about funding career and lifestyle shifts throughout our lifetimes. In practical terms, this can mean setting up an automatic savings program that regularly puts money into a variety of taxable accounts. A savings program like this gives you more financial flexibility because you can tap the money without penalty whenever you need it. Of course, you will pay taxes on along the way and when you sell.

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