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Target Monthly Income and not an Account Balance When Saving for Retirement

Eric Droblyen

December 28, 2022


Most people consider $100,000 a lot of money – I do anyway. But is it a lot of money when you’re saving for retirement? The short answer is it depends upon how old you are. A 30 year-old with a $100,000 nest egg is likely on track for a comfortable retirement at age 65 if they’re saving 10%-15% of their income each year, while a 50 year-old with the same nest egg is likely behind in their savings and will need to save much more each year to catch-up in order to retire at 65.

It can be tempting to slow your rate of retirement savings when you consider the size of your nest egg. It can seem like a lot of money – it may even be more valuable than your house. It’s important to understand it takes a lot of money to pay yourself a monthly income during a retirement that can last 30 or more years – more than you might think.

For this reason, I don’t recommend you evaluate your nest egg in terms of account balance. Instead, I recommend you evaluate it in terms of the monthly income it will “buy” you in retirement. By focusing on monthly income, you’re more likely to match your savings rate during your working years with your anticipated spending during retirement

What’s your retirement income “number?”

The first step in determining how much you need to save for retirement is determining a monthly retirement income target. You can set a target using two approaches – determine a percentage of preretirement income you want to replace or a dollar amount that will cover your monthly living expenses. Many experts say your income replacement target should be 70 to 80 percent of your preretirement income.

How much do I need to be saving for retirement?

Once you have determined a retirement income target, you can estimate the amount you need to save to hit that target. Fortunately, there are free online tools available that can help you.

The Vanguard website offers two calculators to help you estimate your retirement nest egg and how likely it will last through retirement.

  • Their Retirement Savings Calculator estimates a nest egg at retirement based on how much you’re saving as well as a monthly income during retirement.
  • Their Monte Carlo Simulator calculates the probability your nest egg balance will last through your retirement years. It includes sliders to demonstrate how changes impact results.

The MarketWatch Retirement Planner uses sliders, like the Vanguard savings calculator, but also considers data such as home equity and taxable accounts. Its graphs let you adjust assumptions to find a retirement age that can be sustained based on a target percentage of pre-retirement income.

Other sites with retirement income calculators include Bankrate, AARP, and BlackRock.

The effect of fees on your nest egg can be substantial

While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may substantially reduce the growth in your account which will reduce your retirement income. The following example from the DOL demonstrates how fees and expenses can impact your account.

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

Save what you can afford!

It’s important to understand that no planning approach to retirement saving is fool-proof. Like the saying goes, “life happens.” You should not expect an ideal retirement, where you’re perfectly healthy and there are no extraordinary demands on your retirement savings. For this reason, I recommend saving as much as you can afford for retirement. It’s better to exceed your spending needs in retirement than to fall short.

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