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If you’ve ever ordered 2 a.m. delivery after watching a Taco Bell commercial, you may be familiar with the concept of expectation versus reality.
Right now, a large portion of young investors are expecting the equivalent of the pristine Crunchwrap Supreme you see in the ads. Some 44% of retirement savers in their 20s and 30s say they want to retire by 60, according to a recent survey from the World Economic Forum.
But for many younger Americans, the reality — like the food you actually receive at the drive-thru — is much harder to stomach.
The median 401(k) balance among Americans in their 30s is $18,400, according to data provided to CNBC Make It by Fidelity. The median retirement saver in their 20s has $5,400.
These numbers don’t paint the whole picture, of course. Some investors have multiple 401(k) accounts from multiple jobs, and others are saving in other types of accounts, such as individual retirement accounts or regular brokerage accounts.
Still, there’s no doubt that many younger Americans currently aren’t on track to retire at the current full retirement age of 67, let alone at 60.
Wondering how you stack up? Here’s how financial pros say you can calculate whether or not you’ll be able to retire when — and how — you want.
Determining if you’re on track to retire requires you to first understand what it is you’re aiming for, and that can be tricky.
Think about your financial situation now. Is it exactly where you thought you’d be five or 10 years ago? Probably not. Similarly, you’re not likely to get everything right when calculating what you’ll need 30 years from now, or your progress toward achieving it.
But if it’s something you’re thinking about, start with some classic rules of thumb to determine if you’re on the right track.
1. Pay attention to your savings rate
If you’ve been diligently saving a healthy portion of your income and investing it for retirement, chances are you’re doing better than most.
“A general rule of thumb would be to save at least 15% of your gross household income toward retirement,” says Russell Gaiser, a certified financial planner with advisory firm The Financial Guys.
If you’re socking that much away while avoiding high interest rate debt, such as credit card debt, you’re likely on the right track, he says.
2. Check out Fidelity’s guidelines
Add up the totals in your various retirement accounts and compare them with Fidelity’s savings thresholds for people at different ages for a “quick and dirty benchmark,” suggests Christine Benz, director of personal finance and retirement planning at Morningstar.
These guidelines say you should aim to have the equivalent of your annual income saved by the time you’re 30 and three times your income stashed away by 40.
3. Find your FIRE number
Those in the FIRE community — short for financial independence, retire early — aim to hit an amount in their retirement account they can withdraw from in perpetuity. You can find your figure, known as a FIRE number, by multiplying the annual income you hope to live on in retirement by 25.
Really, you’re dividing by 4%, which is thought to be the safe annual withdrawal rate from a retirement account for a traditional 30-year retirement. Critics have pointed out that the calculation is deeply imperfect, but if you’re looking for a big number to measure against, you could do worse.
Now that you have a general idea of how much you’re aiming for, you can figure out if you’re on track to retire when you want. To do that, you’ll have to work backward. Here’s some more back-of-the-napkin math to get you started.
Start with what you’ll need to live on in retirement, which is generally 70% to 80% of your pre-retirement income, says Gaiser. Then assume a withdrawal rate — what you’re going to take out every year while, hopefully, your investments continue to grow. Some experts say 4% is a good rule of thumb. Others are more comfortable with 3.5%.
And remember, you’ll be collecting Social Security. The size of your benefit will change depending on when you claim it. Make sure you calculate a reasonable rate for your investments to grow, too. And don’t forget to adjust the whole calculation for inflation.
Have you ripped up your napkin yet? Luckily, there are plenty of online calculators that take a lot of these factors into account. Benz suggests using a few of them and comparing the results.
“You can plug in your current savings rate, your anticipated spending in retirement, all that stuff,” she says. “Most calculators use some version of your current spending adjusted for inflation until the year you expect to retire and then through retirement. I wouldn’t try to come up with these numbers on your own.”
Benz suggests shopping for calculators on the list from Bogleheads.org.
“It’s a really nice compendium and a really useful resource,” she says.
Even calculators won’t be able to take everything into account.
“It’s going to look very different for singles and couples,” says Gaiser. “You’re in your 20s, then you get married. Then you’re in your 30s and you’re having kids. It’s going to look a whole lot different.”
Or maybe you haven’t been on track to invest so far, but are now well situated, says Benz. “What if you paid off a bunch of student loan debt when you were young, and now you’re in a position to super-save for retirement?”
That’s why, as good as the calculators can be, Benz recommends talking to a pro. “Hiring a financial advisor — even one you pay hourly — would be the gold standard,” she says.
If a financial advisor finds that you’re not up to snuff, they’ll be able to craft a plan unique to your particular financial situation.
If you come to the same conclusion through your calculations, aim to increase your savings rate and be sure that your investing accounts are fully invested in diversified mutual funds and exchange-traded funds — not just sitting in cash.
Don’t, however, assume a higher rate of return on your investments in order to overcome a perceived shortfall, experts say. By assuming your investments will deliver above-average returns, you are either lying to yourself about where you are or could be tempted to take on riskier bets to get your desired return.
Benz says a “sober” market forecast for a balanced portfolio of stocks and bonds is about an annualized 5% or 6%. An all-stock portfolio might deliver somewhere between 8% and 12%. Venturing much higher in your expectations is dangerous, she says.
“Don’t assume you’re going to get some Hail Mary in the market. I would avoid trying to pull that lever.”
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