Whether you're just starting out or are well into your career, you may wonder: Are my retirement savings on track?
An online calculator may help, provided you find one that makes reasonable assumptions about the amount you plan to spend in retirement and takes key factors, including inflation and taxes, into account. But if you want to avoid having to read the fine print to assess those assumptions - not to mention the sales pitches often embedded in these tools - there are several low-tech methods that can help.
Why bother tracking your progress? With regular checkups, you can avoid the potential for a nasty surprise as retirement looms. Moreover, according to psychological research conducted on students at the University of Waterloo in Ontario, those prompted to monitor their savings progress are more successful.
As with any generalized guidance, it's important to understand the pros and cons of each method and adapt it to your own situation.
When financial planners assess whether clients are on track to reach retirement goals, they generally use software that's not available to the public.
But with some relatively simple math, you can get a sense for what they do, says Michael Kitces, partner and director of wealth management at Pinnacle Advisory Group Inc. in Columbia, Md.
The first step is to estimate the amount you want to spend in retirement. If you have no clue, use the 80% rule of thumb. It assumes that retirees can get by on about 80% of what they earned before retiring because they no longer need to commute or save for retirement and frequently wind up in a lower tax bracket. Using the rule, a couple with a $100,000 annual income would need an annual retirement income of $80,000.
The next step is to deduct from that $80,000 the couple's expected Social Security and pension benefits. If they are entitled to $35,000 a year in Social Security, for example, they would need savings to supply the remaining $45,000.
Mr. Kitces suggests multiplying that number - $45,000 in this case - by 25. The result - or $1.125 million - is the amount the couple would have to save to be able to withdraw $45,000 a year without violating the 4% "safe" withdrawal rate that historically has ensured retirees a high probability of never running out of money.
If the couple has saved $560,000, they are about halfway to their $1.125 million goal. But assuming both partners are 50 years old, are they on track?
Here, another rule of thumb can help. Known as the Rule of 72, it calls for dividing 72 by the rate of return the couple's investments can reasonably be expected to earn. The result is the number of years it will take to double their money.
If the couple invests 60% in stocks and 40% in bonds, they are likely to earn a real return of about 5% a year. (That's a weighted average of the 7% per year stocks have earned after inflation since 1926 and the 2% annual inflation-adjusted return on bonds.)
Since 72 divided by 5 is about 14, the couple's savings are likely to double every 14 years. As a result, by the time they are 65, their $560,000 should double in real terms to reach $1.12 million.
Cons: This method doesn't account for future contributions to retirement savings. And because returns rarely conform to long-term averages, it's important to repeat this exercise periodically.
'X' times salary
If you prefer to skip the math, Fidelity Investments has devised a shortcut. But you have to make sure the assumptions make sense for you - and make adjustments if not.
According to Fidelity, a person who starts saving around age 25 and expects to retire in 42 years should have saved an amount equal to his or her annual salary at age 30. By age 40, the goal is to have saved three times his or her current salary, en route to six times at age 50, eight times at age 60 and 10 times by age 67, the age at which people born after 1959 are entitled to full Social Security benefits. (This assumes a salary rises by 1.5% a year after inflation and that half the portfolio is in stocks.)
This approach is designed to replace 45% of preretirement income - or $45,000 annually for someone with a $100,000 salary - for approximately 25 years. (Fidelity assumes Social Security covers the rest.)
To hit those targets, Fidelity recommends saving about 15% a year, including any contribution your employer may make to a 401(k)-type account.
"The methodology is based on maintaining your current lifestyle in retirement," says Meghan Murphy, a director at Fidelity. Those who want to live more lavishly in retirement or retire in under 42 years should save more than 10 times their final salary. Those who plan to live more frugally or retire later may be able to get by with less, Ms. Murphy says.
Cons: This rule of thumb applies only to people making between $50,000 and $300,000. As with the other two methods, this one doesn't help you figure out how much to increase your savings rate if you need to catch up.
Safe savings rate
With this method, you can avoid having to track your progress entirely. But while this rule of thumb is easy to use if you're starting out in your career, it's harder to adopt midstream unless you have access to specialized software for advisers.
The method establishes the amount someone should save annually to replace half of preretirement income - for example, $50,000 of a $100,000 salary - with a high probability of sustaining that spending over a 30-year retirement. (As with the other two methods, this one assumes the initial withdrawal rises annually to keep pace with inflation.)
For someone with 30 years to go before retirement and a portfolio with 60% in stocks and 40% in bonds, the required annual savings rate is 16.6%, says Wade Pfau, a professor of retirement income at the American College of Financial Services in Bryn Mawr, Pa. A person who plans to work for 40 years should save 8.8% a year. Those are the rates his research indicates would have been high enough over 30 and 40 years, respectively, to replace half of preretirement income over the past 150 years, even amid the worst stock-market returns.
"If someone saves responsibly throughout her career, she will likely be able to finance her intended expenditures" even if a bear market results in a smaller-than-expected balance at retirement, says Mr. Pfau. The reason why, he adds, is that during a bear market, stocks often become cheap enough to ignite a rally that helps the portfolio recover.
With this approach, Mr. Pfau says, "the way to track your progress is simply to make sure you are saving the right amount every year."
Con: If you are in the middle of your career and haven't saved the required rate, it's not easy without professional help to figure out how much more you'll need to save to catch up.