With all the talk about saving as much as humanly possible for retirement, it's hard to know if you’re on the right track.
Either you're putting too much money toward everyday pleasures, or even your best efforts aren't enough. A recent analysis by the Employee Benefit Research Institute estimated that a 25-year-old woman saving for retirement would need to more than double the amount of money she's setting aside now if stock market returns dip over the next few decades. Sia's not the only one nostalgic for the present.
While there's no surefire way to predict how the markets will perform — this week or over the next 40 years — there is easy research you can do to make sure you are smartly saving for retirement. One place to start is with the Retirement Planner Calculator from the American Institute of Certified Public Accountants (AICPA).
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"Generally speaking, there isn’t a magic number for retirement," says Kelley Long, a certified financial planner and AICPA expert. "For one person, $50,000 could be the 'magic' number, and for somebody else, $5 million might not be enough."
So instead of picking a target number that just kind of sounds good, she suggests making a series of educated guesses and honing them as your life and career changes. Some general areas to consider as you make those decisions: your current age, (ideal) age of retirement, current savings and investments, and lifestyle you want to enjoy when you retire.
A few notes on the calculator. The average American retires between ages 61 and 65 — with most holding out until 65 so they can take full advantage of Medicare benefits. "Annual retirement savings" indicates the percent of your salary that you're setting aside for retirement each year, whether you're investing in a 401(k) program through work or an IRA.
If you enter $0 in the box for "current retirement savings," don't despair. It's never too late to begin saving. Start out with setting aside 1% and increase that a percentage point every six months, Long suggests. The ideal goal is 10% if you’re under 30, more if you’re getting a late start.
"[For someone earning $50,000 a year], 1% is the equivalent of $42 a month," she says. We don't want to dredge up the old "If you didn't buy coffee every morning..." advice (and please keep your avocado toast) but $42 may not be a huge amount to cut from your monthly spending habits. If it's not skipping an afternoon latte, maybe it's downsizing your gym membership or eating in more at home. Small tweaks can make a big difference.
Additionally, this calculator looks at how much of your current income you expect to need to live on when you retire, and for how long. This requires some more guesswork on your part (and maybe a little daydreaming?). Long says that 70% to 80% of your annual salary is the industry standard estimate, but that of course changes depending on your plans. If you'd prefer to live extremely frugally and become a coupon queen, that percentage can drop. Have plans to travel around the world and buy a castle? You'll need to significantly increase that amount. This number will likely change as you get closer to actually thinking about stopping work, Long explains, so stick to 80% now for a more conservative estimate.
"Look at retirement planning as: Am I on track to at least be able to maintain the same lifestyle that I [currently] have for the rest of my life if I stopped earning money?" Long says. In the end, that might mean cutting back on your lifestyle now, or adjusting your expectations for your lifestyle later, and honing in on those goals over time. The most important thing is simply to start.