How To Decide The Size Of Your Retirement Nest Egg
The bottom line question in all retirement planning is this: How much money will you need?
The answer depends on your circumstances, of course.
Fidelity Investments' rule of thumb is that at the start of retirement you need at least eight times your final preretirement salary to assure that you won't outlive your savings for at least 25 years.
Fidelity assumes you retire at age 67 and want to replace 85% of your preretirement income, including Social Security, which is not part of the salary-times-eight savings.
With a nest egg equal to eight times your final preretirement salary, you should be able to afford to withdraw 4% a year to help pay living expenses for 25 years, says John Sweeney, executive vice president of retirement and investing strategies at Fidelity. Social Security benefits pay for the rest.
"At age 65, our target date portfolios have about 55% in equities," Sweeney said. "You need equities to drive growth to outpace inflation. And the portfolios have another 35% in fixed income and 10% in (cash) to take some (short-term) risk off the table. "
Aon Hewitt, a human resource consultant, advises workers to save at least 11 times their ending salary. So if your ending salary is $150,000, your retirement kitty must start with at least $1.65 million.
To get a custom-tailored answer, start by listing your retirement goals. Will you live in a big or small home? Do you plan to travel a lot?
How long do you expect to live? Is your health good? How long did your parents, grandparents and great-grandparents survive?
Build A Budget
Next, translate your wish list into a budget. What do you expect to spend in a typical year within the first, say, five years of retirement?
Include housing, food, health care, clothing, travel and gifts.
"For many clients, that will range between 75% and 85% of preretirement income, but it can be higher or lower," said Mervyn D'Mello, branch office manager for Scottrade at The Villages, Fla.
Your target income includes Social Security benefits.
Your annual retirement spending will typically be around 4% of your starting balance. It may be adjusted yearly for inflation.
Will the amount you've saved and your rate of savings get you where you're trying to go -- a nest egg that will support you and your spouse based on your spending goals for 25 or 30 years?
The easiest way to find out is by using an online calculator.
In fact, use more than one. Many calculators weigh factors differently. Which should you use? All the major ones are valid, but use the one that makes the most sense to you.
TransamericaCenter.org's calculator has a built-in tool that shows how much in Social Security benefits to expect . But it does not show you how large your nest egg will be at retirement.
Bankrate.com's calculator shows nothing about Social Security income. But it shows portfolio size at retirement and yearly balance. You can tweak assumptions like the expected inflation rate.
Fidelity.com's calculator lets you plug in and adjust numerous variables. Then it shows how much you'll need in total and how much you're on track to have. It also lets you indicate how aggressively you invest in your retirement accounts.
"The most important thing is to have an investment plan," D'Mello said. "Compare that to your actual progress, and see if you're on the right path or if you need to change something to reach your goal."