Tracking Your Retirement Savings Progress

It’s common to wonder if you’re saving enough money to retire when and how you want to. Setting some benchmarks can help you assess your current situation and see if you’re on track to save. You might find you need to be setting aside more money on a regular basis to achieve your retirement savings goals.

What retirement savings benchmarks should I consider?

Just as a fitness tracker monitors progress toward fitness goals, some common benchmarks can help you stay on track with your retirement planning and savings. There are plenty of benchmarks and rules of thumb to consider, so you need to figure out which ones apply to your situation.

Whenever you encounter these considerations, look at the underlying assumptions. If you’re making estimates with a retirement calculator, does it assume you’ll receive Social Security benefits? Will your retirement age be 62? Will you need a certain percentage of your annual salary in retirement?

Once you know the assumptions, you can decide how they apply—or don’t apply—to your own situation.

What are some common retirement savings benchmarks?

It’s estimated most people will need at least 8 times their final salary by retirement age of 67 to fund retirement at 85% of pre-retirement income. For instance, a final salary of $120,000 would mean you should have $960,000 saved for retirement.

Here are some helpful benchmarks to consider.

1. Using retirement savings plans. Have you already started saving in an employer-sponsored plan, traditional individual retirement account (IRA) or Roth IRA? Getting started is the most critical financial decision to make when it comes to saving money for retirement.
2. Savings amount by 35. As a starting point, aim to have saved the equivalent of 1 year of salary by age 35. Take your current age and subtract it from 35. Let’s say you’re 26 years old and are earning $45,000 a year. Divide $45,000 by 9 years (that’s 35 minus 26). In this representative example, you’d need to save about $5,000 a year—or about $417 a month—to reach the benchmark goal.
   
   Keep updating the math as you age and earn more to estimate how much to set aside each year.
3. Savings amount by 45. Plan to have saved 3 times your salary by age 45. For example, if you’re making $55,000 a year at this point, then you should have about $165,000 in your retirement savings account.
4. Savings amount by 55. Aim for 5 times your salary by age 55. For example, if you earn $65,000 a year, then you should have $325,000 saved for retirement.
5. Savings amount by 67. If you’ve been staying on track by meeting the savings benchmarks over the years, then you should be able to save 8 times your final salary by age 67. For example, if your final salary is $75,000, then your retirement savings target would be $600,000.

Managing loans and withdrawals

Dipping into your retirement savings can provide you with fast cash, but don’t take this action lightly. There can be fees and penalties for taking out retirement earnings before your retirement date arrives. Plus, you’ll have to do more work to replenish your savings to meet your retirement goals.

Taking loans from 401(k) accounts

Many 401(k) plans let participants borrow from their retirement accounts to buy homes, pay for education or medical expenses, or prevent eviction or mortgage default. Generally, you may be allowed to borrow up to half your vested balance up to a maximum of $50,000 or less if you have other outstanding 401(k) loans.

Usually, loans must be repaid within 5 years, although the deadline may be extended if the money is used to purchase your primary residence. Servicemembers also may get an extension during the time they’re on Active Duty.

Potential advantages of 401(k) loans:

• You won’t need a credit check.
• Interest rates are generally low compared with most consumer loans.
• You’re paying yourself back—with interest—rather than paying a financial institution.

Potential drawbacks to 401(k) loans:

• If you leave your job, you may have to pay off the loan immediately and usually within 30 to 90 days. Otherwise, you’ll owe income tax on the remainder, as well as a 10% early distribution penalty if you’re not a retiree and under the age of 59½.
• You may not be able to afford to make the payments as well as make new catch-up contributions, thereby significantly reducing your potential long-term savings.
• While you’re borrowing pre-tax money, you’ll be paying it back with after-tax money, but you’ll still owe taxes on withdrawals in retirement.

Additional tax implications

With 401(k) and traditional IRA withdrawals, the money is added to your taxable annual income, which could bump you into a higher tax bracket. It could even jeopardize certain tax credits, deductions and exemptions tied to your adjusted gross income (AGI).

Losing compound earnings

If you borrow or withdraw your retirement savings, you’ll lose out on the power of compounding, where interest earned on your savings is reinvested and generates more earnings.

The bottom line on borrowing from retirement accounts

Think long and hard before tapping into your retirement savings or nest egg for anything other than retirement itself. If a withdrawal is your only recourse, be sure to consult a Certified Financial Planner (CFP) or a financial advisor about potential tax implications.

Keeping tabs on your retirement accounts

So, how often should you review your retirement accounts to make sure you’re making progress? The following scenarios will help you decide when to benchmark your savings.

Review your contribution limit rate:

• each time you receive a raise in salary, or at least once a year
• if there is a change in your workplace retirement plan employer match level
• if you’re falling behind in your savings rate and need to catch up

Review your investments:

• at least once a year
• whenever you’ve reached a savings goal
• if your goals, timeline or risk tolerance have changed
• if your investments are consistently underperforming their related market indices

Our financial advisors can help you evaluate your priorities and outline strategies to help you stay on track. Reach out to Navy Federal Investment Services for help with your retirement planning.