Feb. 21, 2018

Are You Saving Enough for Retirement?
A top concern for many people approaching retirement is whether they’ve saved enough money — fearing they’ll outlive their savings. And that’s understandable: It’s hard to know exactly how much savings you’ll need over the course of retirement given all the big unknowns, such as what age you’ll live to, inflation and its effects on your cost of living, and your future health care and long-term care spending needs.

That said, these two basic rules of thumb can help you determine whether you are on track:

The 4-Percent Withdrawal Rule
Financial researchers have determined that many retirees could be able to withdraw 4 percent of their retirement portfolio in the first year of retirement and continue to withdraw that amount—plus an annual adjustment for inflation in all later years—and not run out of money for at least 30 years. However, that rule assumes a retiree is generating an annual 4 percent rate of return and allocating a large percentage, 50 percent to 75 percent, of their investment portfolio to stocks.¹ That means withdrawing 4 percent might be risky for a retiree who holds more bonds and fixed income than stocks in their portfolio.

Here’s an example of how you can use the 4-percent rule to gauge whether you’re saving enough. Let’s say you determine you will need to generate about $30,000 a year from your retirement portfolio annually. (This does not include your Social Security retirement benefit.) Doing the math, you simply multiply that amount by 25 to figure out what you will need in total savings. Since $30,000 x 25 is $750,000, that means you should expect to need $750,000 in your portfolio by retirement.

To be extra safe, some retirees modify the 4-percent rule and instead withdraw just 3 percent of their retirement portfolio in the first year of retirement, adjusting that amount for inflation annually in future years. That may be particularly wise for retirees who invest conservatively.

Your Pre-Retirement Income
Another common measure of how much retirement savings you need is to take the amount you earned right before retirement — and then assuming you will need a particular percentage of that amount. That percentage could be anywhere from 50 percent to 90 percent and of course depends on your projected Social Security benefit and how your spending will change in retirement.

For example, let’s say you made $60,000 right before retirement and you expect your income needs will decline only slightly in retirement. You thus decide you’ll need to generate about 90 percent of your pre-retirement income — or $54,000. For simplicity, let’s say you expect an annual Social Security benefit of $14,000. That means you would need to generate $40,000 a year from your retirement portfolio.

Going back to the 4-percent rule, you can multiply that $40,000 by 25 and estimate that you would need about $1 million by the time you retire.

The Benefits of Being Realistic
Ideally, you will have more than enough saved by the time you want to retire. But if you realize that you won’t, you will need to make some tough choices. These may include working longer in order to save more for retirement or cutting back on your spending plans for retirement.

Let BOK Financial Advisors help you review your retirement saving target to determine whether it’s right for you, given your goals and other retirement income sources. An advisor can also help you build a retirement saving and investing strategy to help you meet those goals.