AS A RULE OF THUMB, you should probably save 12% to 15% of your pretax income toward retirement. If your employer has some sort of traditional defined benefit pension plan, which will pay you income every month in retirement, you can likely save less.
Similarly, if your employer makes a fixed or matching contribution to its 401(k) or 403(b) plan, you might be able to trim your savings rate. Suppose your employer matches your 401(k) contributions at 50 cents on the dollar up to 6% of pay. To hit a 12% savings rate, you only need to sock away 9%, because you’ll get 3% from your employer.
If you want a better sense for how much you ought to save every month, by factoring in how far you are from retirement and how much you have already saved, try playing around with one of the many online financial calculators. But given all the uncertainty about market returns, take these projections with a grain of salt.
You might start with the retirement planner from Dinkytown.net (named after a neighborhood in Minneapolis). You can quibble that the calculator is overly simplistic and easily abused: It presumes you earn the same return year after year, which is unrealistic, and delusional folks can make everything look rosy by assuming an absurdly high rate of return. Still, it offers a quick look at your retirement readiness. If you have something akin to a 60% stock–40% bond portfolio, override the default investment returns: For the period both before and during retirement, plug in a 4% annual return and 2% for inflation.
What’s the problem with assuming the same return year after year? Check out FIRECalc.com, which drives home a key concept every retiree needs to grasp: sequence-of-return risk. The bottom line: If you get rotten returns early in retirement, you can quickly end up in financial trouble, even if average returns over your retirement are just dandy.
Many online retirement tools are time-consuming and users are required to register. Looking for something less onerous? Check out AARP’s retirement calculator, the target your retirement tool from Boston College’s Center for Retirement Research, and Vanguard Group’s retirement income calculator. Want something more sophisticated? Try NewRetirement.com, which will not only tell you whether you’re on track for a comfortable retirement, but also makes suggestions for further strengthening your finances.
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