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Are You Saving Enough for Retirement?

Knowing how much to save for retirement is a two-fold challenge. First, it’s difficult to estimate your expenses—and thus your income needs—for a retirement that’s years, if not decades, away. Second, even after you settle on a target portfolio size, it’s hard to gauge if you’re saving enough each year to reach that goal.

To bring some clarity to this retirement-savings conundrum, we’ve developed a formula you can use to calculate how your current savings stack up against your retirement goals, based on your age, annual contributions, and target annual withdrawals. Once you’ve determined whether your portfolio is on track, behind, or ahead of your target goals, you can consider next steps. 

 How much will you need?

Let’s first consider how much you’ll need for retirement. Retirement looks different for everyone, but there are some basic assumptions we can use to figure out how much to save. One approach is to assume you’ll maintain the same lifestyle in retirement that you enjoy today, which many retirees do, at least in the early years.

Fortunately, that doesn’t mean you’ll need to generate your current annual salary from your retirement savings, especially after accounting for Social Security benefits and the annual retirement savings contributions you’ll no longer need to make.

For example, if you currently earn $50,000 a year, contribute $10,000 annually to your retirement accounts, and expect to receive $12,000 per year in Social Security benefits, you’ll only need to withdraw $28,000 a year from your portfolio to maintain your current lifestyle ($50,000 – $10,000 – $12,000, in today’s dollars).

Once you know how much income you’ll need from your portfolio each year, you can determine whether your current portfolio balance is on track using the equation below. Note: When entering your total annual contribution, include your employer’s contributions, if offered.

(The multipliers are calculated using a variety of factors, including life expectancy and projected investment returns.)

Determine how much you should have saved by now by multiplying your first-year withdrawal by your multiplier.

 *Total annual contributions include employer contributions, if offered. | In today’s dollars. | Multipliers are calculated using a variety of factors, including life expectancy and projected investment returns.

Where does your balance fall?

By running your numbers through the above formula, you can determine whether you’re behind target, on track, or ahead of target to reach your retirement savings goal.

Here’s what to do next, depending on your situation:

If you’re behind: Don’t panic—but do act. Here are a few things you can do to get back on course:

  • Save more now: It’s the most obvious—and probably the most difficult—solution, but the sooner you boost your savings, the longer your money has to potentially benefit from compound growth. Make sure you’re saving at least enough to capture your full employer match, if offered.
  • Reassess your goal: Are you sure you’ll need as much as you think? Don’t forget to consider Social Security and other sources of income when calculating how much you’ll need from your portfolio in that first year, as well as expenses that may go away in retirement, such as commuting costs or a mortgage payment.
  • Stay flexible: Don’t get discouraged. If you work a few years longer, or if you work part time in retirement, you may not need to tap your portfolio for income right away. That could also help delay Social Security, which could boost your benefit by as much as 8% per year after you reach full retirement age.

If you’re on track: Keep up the good work:

  • Max out your retirement accounts: If you’re age 50 or older, in 2021 you can contribute up to $26,000 to a 401(k) and up to $7,000 to an Individual Retirement Account. (Those under 50 can contribute up to $19,500 and $6,000, respectively.)
  • Stick with stocks: Your portfolio should become more conservative as you near retirement—but not too conservative. Consider maintaining at least some exposure to stocks to capture market growth, but not so much that you lose sleep should the market stumble.

If you’re ahead: Congrats! To maintain your cushion:

  • Keep saving: Continue saving as much as you can for as long as you can. You never know when life—or the market—will throw you a curveball.
  • Revisit your assumptions: Double check that you haven’t underestimated how much income you’ll need in retirement, or overestimated how long you can stay in the workforce. And be sure you’ve accounted for expenses that may go up in retirement, like health care and housing.

Get a second opinion

No matter where you are on your journey to retirement—but especially if you’re falling behind on your savings—working with a financial planner is a great way to pressure-test your retirement assumptions and create a realistic plan. And the sooner you act, the more time you’ll have to make any necessary course corrections.

What You Can Do Next

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

These examples are hypothetical and provided for illustrative purposes only and are not representative of any specific investment or strategy.

Investing involves risks including possible loss of principal.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Charles Schwab & Co., Inc. (“Schwab”) recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.


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