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Am I saving enough for the retirement I want?

There’s no one-size-fits-all answer. These four steps can help you figure out the amount that’s right for you.

 

ASK THREE RETIREMENT EXPERTS how much you need to save for retirement, and you’ll likely get three different answers. One might respond with a specific number, say $3 million; another might suggest you save enough to let you draw down 80% to 90% of your annual pre-retirement income every year; and a third may say you should strive for 12 times your pre-retirement salary. So what's right for you? And how do you know if you're on track?

 

A financial advisor who understands your current financial priorities and your vision for retirement can be a big help as you seek answers to those questions. Working through the following steps together, you can identify a sustainable savings target, one designed to support your desired lifestyle over a retirement that could last 30 years or more. “Your financial advisor can also suggest ways to adjust your current savings and investment plan to help achieve that amount,” says Jeremy Kaneer, director, Retirement & Personal Wealth Solutions for Bank of America.

1. Ask yourself: How long could my retirement last?

"There are multiple personal variables to weigh when starting to think about how much you’ll need to save for retirement,” says Kaneer. Your current age may be among the most important. Especially if you’re young and in good health, your retirement may last several decades, he notes. No matter what your current age is, however, you may find that you end up retiring earlier (or later) than expected based on unforeseen circumstances. Either situation could affect the number of years you will need to rely on your assets for income, and it’s important to plan for those possibilities.

2 Picture your perfect retirement.

"There are multiple personal variables to weigh when starting to think about how much you’ll need to save for retirement.”

— Jeremy Kaneer, director, Retirement & Personal Wealth Solutions for Bank of America

Having a clear idea of the sort of lifestyle you want in retirement will help you estimate how much it could cost annually. Start by thinking about your essential or non-negotiable regular expenses, such as a roof over your head, food on the table and out-of-pocket healthcare expenses. Then consider expenses that are important to your lifestyle, which might be anything from dining out and regular travel to offering financial support to aging parents or helping adult children or grandchildren with education. Keep in mind, too, that some essential expenses — such as your own healthcare spending — may increase in retirement, while your retirement lifestyle may shift as you age.

 

Finally, consider any aspirational or discretionary goals you may have like purchasing a second home or pursuing certain philanthropic activities during retirement. “We have clients who have their own family foundations,” says Merrill Financial Advisor Katherine Darragh Larsen, making philanthropy central to their planning. Just as you juggle and prioritize competing goals when you’re younger, you’ll need to do the same in retirement. 

3 Review how much you already have saved.

Once you have a target annual income figure in mind, you and your advisor can take an audit of all of your anticipated sources of retirement income (retirement accounts, Social Security, possibly a pension, annuities, rental income and an inheritance or sale of a business) and calculate how much you could potentially draw from them once you retire. Your personal retirement accounts may be one of your biggest sources of income, and you could be surprised by how much — or how little — even a seemingly large retirement account could provide over the course of a long retirement. See the chart below. 

* The accumulated investment savings by age 65 could provide an annual retirement income, adjusted for future inflation (in today’s dollars), of this amount with a high (95%) probability of success for a life expectancy of 91 years, if withdrawn at a sustained spending rate of 3.84%,  and invested using conservative asset allocations. Source: Chief Investment Office, Portfolio Analytics, “Determining sustainable retiree spending rates: Beyond the 4% rule,” January 2022.

Your advisor can estimate how your assets might look in the future, given your current savings rate and investment allocation, factoring in the risk of inflation and market performance. (You can prepare for that conversation using our Personal Retirement Calculator, which lets you view a projection of your future savings based on your age and current savings rate.) 

4 Close the gap: Adjust your strategies to pursue the income you’ll need.

You and your advisor will then be ready to talk about any adjustments you might need to make to pursue your retirement goal. If you’re now in your mid-30s, you may have 30 years to build assets, but “if you’re relatively close to retirement, a first step may be figuring out what you’re spending today and calculate whether you’re currently on track to support that in retirement,” Larsen says.


“Even if you find that you're behind where you want to be, don't get discouraged,” advises Kaneer. “There are a number of ways that you can catch up.” First, be sure you’ve maxed out tax-advantaged retirement plans, such as a 401(k) or IRA, and taken advantage of any employer match. And don’t forget that if you’re 50 or over, you may be eligible for additional “catch-up” contributions.

Diagram with hed, “Worried you won’t have enough?” Dek reads, “Disciplined saving can make a big difference — especially if you max out retirement account contributions. So if a saver has only $750,000 set aside at age 50…” To the left is a blue circle with “$750,000” above it. That circle casts out a shadow to its right that leads to two larger, blue circles with “$2,867,015” and “$3,587,948” inside of them. Two red curly brackets connect each larger blue circle with a caption. For “$2,867,015” it reads, “Here’s how things might look at age 65 if they’re able to save $1,000 per biweekly paycheck.” For “$3,587,948” it reads, “Or it would look even better if they maxed out their 401(k) at $27,000 per year and also invested $1,000 per paycheck.” Below the diagram reads, “Source: Bank of American Office of the CIO. Assumes a 7.1% annual return. The 401(k) contribution includes the $6,500/year catch-up contribution for those age 50+, and does not include any potential company match. This example is hypothetical and does not represent the performance of a particular investment. This example assumes annual returns before taxes, fees and expenses. Your results will vary. Actual investing includes fees and other expenses that may result in lower returns than this hypothetical example.

Source: Bank of American Office of the CIO. Assumes a 7.1% annual return. The 401(k) contribution includes the $6,500/year catch-up contribution for those age 50+, and does not include any potential company match. This example is hypothetical and does not represent the performance of a particular investment. This example assumes annual returns before taxes, fees and expenses. Your results will vary. Actual investing includes fees and other expenses that may result in lower returns than this hypothetical example.

“Even if you find that you're behind where you want to be, don't get discouraged. There are a number of ways that you can catch up.”

— Jeremy Kaneer, director, Retirement & Personal Wealth Solutions for Bank of America

“If that’s still not enough, consider other ways to invest for your retirement goals,” says Kaneer. Tax-advantaged options include certain annuities and cash-value life insurance. You might also want to consider participating in a high-deductible health insurance plan, Kaneer adds. When you do that, you’re eligible to contribute pre-tax dollars to a health savings account, which can be rolled over year after year and used in retirement for more than healthcare costs.

 

Beyond saving, a financial advisor may also suggest revisiting your investment strategy. “Asset allocation and thoughtful, goals-based portfolio management are two things that can potentially steer you to a better retirement outcome,” notes Kaneer.

 

Remember, too, that retirement is a journey. “You can always change course if you need to — maybe by working a few years longer or adjusting your expenses,” he adds. But by starting early and planning ahead to pursue a specific attainable goal, you’ll have a far better chance of living the life you truly want in retirement.

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Important Disclosures

 

Opinions are as of 03/31/2022 and are subject to change.

 

Investing involves risk including possible loss of principal. Past performance is no guarantee of future results.

 

This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

 

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).

 

Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad.  Bonds are subject to interest rate, inflation and credit risks. Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government.

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