By Tammy Trenta, MBA, CFP, CTC, CEXP
Founder and CEO - Family Financial

Whether it’s in the form of a frown and a fleeting thought, a serious discussion with a partner, or awakening in a cold sweat at 3:00 am - many of us have fretted over this question: I’m already 50. Have I been saving enough for retirement?

A loaded question - and the answer almost always includes, “It depends.” But as we get closer to retirement, surety feels more important than ever - so getting a more definitive answer becomes paramount. To do that, let’s first get down to basics by breaking things down into two eras: the accumulation period and the retirement period.

Your accumulation period is the time up to the date of your retirement when you are growing that lump sum that needs to last the rest of your life. (If you’re in your 50’s, hopefully, that period has already begun). These days, the accumulation period is especially critical; people are living longer, and many are hoping to retire earlier - so the money might need to last longer than originally expected.

Ideally, you’ll have accumulated the right lump sum - or more - before entering your retirement period. But how can you determine the correct amount to shoot for? No definitive sum works for everyone because each situation is unique. Your current income and expenses might be your starting point - you may need more or less after retirement. To calculate a sum appropriate for you, first figure out how much you’ll need each year to maintain the lifestyle you’d like to have. Inflation aside, take into consideration your retirement needs and wants.

Try the 4% Rule 

Once you’ve determined your annual living expense, multiply that figure by 25. This will give you the total retirement account balance you should be aiming for. It would allow you to spend 4% of your total balance each year. Given that an average investment return is 8%, this formula should keep your principal intact while leaving room for inflation and a little growth - all while meeting your day-to-day expenses.

For example, if you’ve determined you’ll need $40,000 a year to live comfortably and have no other sources of income, then multiplying $40,000 by 25 will tell you that you must accumulate a balance of at least $1 million by the time you retire. (4% of $1,000,000 = $40,000).

Next, consider how many years you have to save until retirement. Let’s take this example: Marian recently turned 50 and wants to retire at 60. She has saved $200,000 in retirement accounts. She’ll need $48,000 a year to cover her expenses after retirement.

Marian anticipates $24,000 in Social Security benefits per year, so she’ll need to withdraw $24,000 per year from her savings to meet her expenses. $24,000 x 25 = $600,000, so Marian knows she’ll need $600,000 by age 60 to retire. Using a financial calculator, the $200,000 she’s already saved can grow at 8% - but Marian will need to put in another $853 per month to achieve her goal of $600,000 over the next 10 years.

In the example above, Marian counted Social Security income in her calculations; perhaps you are wondering if it will be there by the time you retire. If you are in your 50’s and plan on retiring in your 60’s, you’re pretty safe. Your best bet is to start saving early so Social Security becomes the icing on the cake.

When you do your own calculation, your first thought may be, how will I ever catch up? It’s important to think realistically and not panic. Conservation is important, but I also believe we should live life. It’s possible you may not be as stuck as you think. 

Even if you work in a position where negotiating a salary increase is all but impossible, we are living in the era of the side gig. Could you create a side business to increase your current income? And if you own a business, you can contribute to a separate retirement plan - which can help bump up your retirement balance.

Speaking of owning a business - make sure you’re paying enough into the system to qualify for Social Security. I’ve seen business owners become unpleasantly surprised when they look to retire, only to realize they have not paid themselves enough on paper to qualify. To be clear, you need 10 years, or 40 quarters of coverage to qualify for benefits.

Knowing how much you'll need every year when you're retired and then working backwards from there will get you to the number you should aim for.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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