A recent study by Fidelity Investments suggests that you should save at least eight times your ending salary to meet your retirement income needs. In other words, if you make $50,000 a year, you need to have saved at least $450,000 by the time you retire.
Following this “8x” formula, an average worker should be able to replace 85% of his or her pre-retirement income. While the formula may seem unreachable at this point to you, it should be reached in phases – having at least one times your salary saved by age 35, three times your salary saved by age 45, and five times your salary saved by age 55. If you take these preliminary steps, reaching the “8x” goal by age 67 should be attainable.
As you have heard repeatedly, there are two factors that have the greatest impact on retirement savings – starting early and saving consistently. If you begin saving at age 25 and continuously works and saves until age 67, using your workplace provided retirement plan – in our case, the Ministers’ Retirement Plan, you should be able to reach the retirement goals suggested.
These projections assume that you will make continuous annual salary reduction contributions to your retirement plan beginning at 6% annually and escalating 1% per year until you reach a high of 12% annually; however, the projections only assume an ongoing 3% annual employer contribution. The projections also assume that your accumulations will maintain a lifetime annual growth rate of 5.5%.
In should also be noted that Social Security payments are factored into the replacement ratio of 85% mentioned above.
While some analysts suggest that your replacement ratio should be 100% of your pre-retirement income, others believe that you can do well financially based upon only 75% of your pre-retirement income. The ratio is going to vary based upon your needs and your spending habits. However, the 85% replacement ratio takes a middle-of-the-road approach.
So based upon these ideas, where do you stand. If you are age 45, have you saved three times your annual salary? Why not?
There are all types of programs and “apps” that can help you project your retirement needs. However, this simple formula seems to work about as good as any. So try the “8x” formula today – and see how you stack up!!