The Way We Compare Retirement Savings is Broken: Here’s Something Better

Am I on track?

No matter the person, their stage in life, or their level of success, this is the ultimate question I hear as a financial advisor. What they specifically mean by ‘on track’ can vary by person, but most are curious to know if they have saved enough to retire comfortably.

For high earners (loosely defined as a married couple earning over $500,000 annually) it’s common for them to ask “how much does everyone else at my age/income level have saved?” because they are also high achievers and want to know how they stack up.

The problem is the answer can be misleading, especially for passionate and successful people because it’s likely time to change your comparisons for retirement savings benchmarks.

How do I stack up?

A recent survey by the Federal Reserve tells us that only around 10% of retirees have more than $1 million in their nest egg at the time they retire. Let’s say that another way: 90% of folks who are retiring have an investment & savings portfolio that is less than $1 million.  

One million dollars may sound like a lot, but if we factor in a very “safe” spending rule of thumb, that $1m portfolio will provide about $40,000 a year, or $3,300 a month.

Assuming the retiree is used to an income well above that level, they will need to reduce spending drastically or rely on Social Security and supplemental income to make ends meet. Run those numbers for yourself – is $3,300 a month enough to do what you want in retirement?  

But for the sake of understanding the data, let’s satiate that curiosity about how others are doing.  

Average 401(k) Balances by Age 

Your 401(k) savings is a good indicator of your progress in saving for retirement, but it can be hard to know if you have enough in the bank without a good benchmark to reference. 

According to Investopedia, the below chart outlines average 401(k) balances at different ages. This is a quick, at-a-glance way to check in on your progress. 

If your savings exceed these averages, you're doing better than many working Americans. For you, it’s time to review more of your financial life and net worth to evaluate how to give yourself the best options in terms of retirement.    

Why are so many comparisons bad?

It is likely that if you’re reading this post, or sitting in our offices at Plancorp, you’re far ahead, even of the top 10% of Americans. You’ve saved your first $1 million or close to it, and still have time to grow! If that’s the case for you, it’s also likely that $1 million doesn’t seem like near enough to actually retire with, and you’re wondering the best ways to bridge that gap.

The truth is, you’ve outgrown most mass financial media and advice. Your situation is simply more complex than most Americans, but don’t think that is a bad thing. You’ve done well and have accumulated above average.

Which begs the question, if you’re above average, should you compare yourself to the baseline data? Does Serena Williams compare herself to the average tennis player at the local court?

The first step is to get a goal in mind that is adjusted to your success.

Optimal Retirement Savings by Age 

Let’s zoom out from just what’s in your 401(k). Determining the right amount to save for retirement can be challenging, given the uncertainties around when you’ll retire, what your expenses might be, your financial goals, and your lifespan.  

These are among the first things we talk about with new clients, and work together to establish a target for monthly or annual savings to give yourself the best options when it’s time to consider retirement.

Fidelity suggests the below milestones for savings at various ages. These aren't just arbitrary numbers; they're based on a percentage of your annual salary and expected retirement needs, better personalizing the recommendation.  

A good goal is to save ten times your pre-retirement income by age 67. If your income today is $500,000, that’s $5 million – using a 4% rate of return as a rule of thumb, this portfolio could provide you with about $200,000 of pretax income annually in retirement. 

This likely sounds a lot more tenable than $40,000/year to enjoy your retirement and achieve some of those goals like travel or supporting the next generation you have in mind. A key benefit to working with a Wealth Manager is putting at times abstract numbers into real 'take home pay' terms.

For example, if you've grown accustomed to a lifestyle at a $500,000 annual income level, we can work with you to establish what a full income replacement savings and investing strategy would look like (i.e. how to save and grow your portfolio to a level it can replace the income you receive working today entirely).

This target might seem lofty, but gradual progress is key, and remember, the magic of compounding is working for you with every dollar saved and day in the market, meaning that starting early is a key to success. Here are some benchmarks to help you stay on course: 

• By 30, aim to save 1x your income. 
• By 40, target 3x your income. 
• By 50, aim for 6x. 
• By 60, strive for 8x your income. 

Are you meeting or exceeding these guidelines? If so, you're on a solid path. For a high earner, sometime between ages 30 and 40 is the optimal time to begin talking to a Wealth Manager to ensure your investments are working for your goals, you're saving enough during your high-earning years to grow over time, and that you’re coordinating all your tax and estate planning as well. 

A great financial plan goes well beyond your investments to fully align your wealth with your goals and values so you can focus on what really matters to you. 

To keep you on track with these benchmarks, be sure to review our Investing by Age series, which will provide great tips and strategies specific to your stage of life. 

What to Do If You're Outpacing Averages 

Choosing the Right Retirement Date 

The age at which you choose to retire plays a crucial role in determining your financial stability in your retirement years. Retiring early is a common goal for many, but doing so can have all sorts of ripple effects, from increased cost for health insurance through Medicare eligibility, a reduction of your Social Security benefits if you choose to collect earlier, and simply missing out on extra high earning years.  

Postponing retirement can enhance these sources of income, but comes with opportunity costs such as losing the freedom to travel and spend time with family that may have moved further away. Many of our clients opt to pursue a second career in retirement which can provide lower levels of income balanced with more freedom in terms of time. 

All this said, choosing a retirement date that aligns your financial goals with your personal goals is critically important, especially if you’re outpacing averages and can maximize peak earning years longer. Working with Plancorp we can help you navigate finding an answer that works for you.

Estimating Your Retirement Income As Well As Your Needs 

Get a clear picture of your income needs and what you’d get through benefits. For example, your Social Security income is likely to act as a supplement to your retirement income if you’re a high earner.

Someone making $250,000 retiring in 2024 at age 70 (maximum benefit) has a projected Social Security monthly benefit is $55,776 for the year, supplementing what you expect to have from your other savings.

Even if expenses like your mortgage are lower in retirement, and you don’t need to continue saving, it is unlikely that you’ll be comfortable living on 22% of your previous salary.  

Accurately calculating your desired income, considering potential unexpected expenses like healthcare, and the uncertain future of Social Security benefits is a vital step in retirement planning. 

This calculation helps determine the savings you need to accumulate by your chosen retirement date. As a safe estimate, I often advise to estimate somewhere in the neighborhood of 80% of your current earnings. One thing to understand is that 80% of your income is a baseline generally established using assumptions like you've paid off your mortgage.

While that may be true, we've seen some be disappointed their savings goal didn't take into account things like travel, vacation homes, or supporting children at a higher level so if you have the capacity to fully replace your income, that can open up possibilities through your retirement. 

Consistent and Adequate Savings 

It all comes down to simple math. Knowing your desired retirement income and ideal retirement age allows you to calculate your necessary savings rate. Using a retirement calculator with a conservative estimated average annual return (say, 7%) on the portion of your portfolio that is invested in equities, you can determine how much of your annual income you need to save regularly.  

If projected savings based on this math seems to be a stretch, the first step is to set a plan in place to increase monthly or annual savings to get to the projected amount, even if it seems out of reach today.

Once you’ve done that, there are several levers to pull besides reduced spending, and it’s a great time to talk to a Wealth Manager who can walk you through the nuance of balancing your income, investment strategy, goals, and other opportunities. Here are a few examples of what that might look like:

You may have too much of your savings in fixed income, preventing gains from keeping pace with inflation. How you manage your retirement savings is critical. Prioritizing tax-advantaged individual retirement accounts like 401(k)s or Roth IRAs over other types of accounts is more likely to maximize your returns through tax benefits.  

You may be able to vary the type of accounts in which you’re saving to better take advantage of current tax savings, reducing your lifetime tax liability not getting trapped by trying to only optimize for your next tax bill.  

Your investment strategy should be a balanced mix of stocks and bonds, adjusted according to your age and personal risk tolerance, that don’t put you at risk of an outsized tax bill. A Wealth Manager can help with these decisions and adjust as your goals and life circumstances evolve. 

Time to Work with a Wealth Manager? 

Some will tell you the only time to work is a financial planner is directly before you reach retirement age or if you have an overly complex plan; candidly based on my experience this is not true.

Here are some other signs that it might be time to work with a wealth manager: 

• You Earn Equity Compensation: This can be a complex area to navigate, and a wealth manager can help you make the most of these benefits. 
• You Have Over $1M to Invest: Your financial situation can benefit significantly from personalized investment advice at this level. 
• You Earn More Than $300,000 Per Year: High earners have unique opportunities and challenges in financial planning. 
• Your Portfolio Isn't Tax-Optimized: Effective tax planning can substantially impact your wealth accumulation. 

Even in the middle class or upper class, you can’t depend solely on your annual salary to achieve your financial goals. If you want to have enough retirement income, the sooner you get started the better.

How to Catch Up If Your Retirement Savings Are Off Track 

If you’re concerned that your retirement savings aren’t aligning with your goals or the more appropriate comparisons mentioned above gave you some anxiety, the first step is making sure you’re maximizing traditional methods like 401(k) contributions.

This is your most tax advantaged (and often employer supported) retirement savings mechanisms. Once you are maxing out your contributions there are advanced strategies tailored for high-income earners to boost your retirement nest egg rapidly. 

Leverage Backdoor Roth IRA Conversions: If you’re already maxing out your 401(k) contributions, consider a backdoor Roth IRA conversion.  

This strategy involves contributing after-tax dollars to a traditional IRA and converting those funds to a Roth IRA. You can do this regardless of your income level. This can be particularly advantageous if you expect to be in a higher tax bracket in retirement, as Roth IRAs offer tax-free withdrawals. 

Utilize Health Savings Accounts (HSAs) for Retirement: If you have a high-deductible health plan, contributing to an HSA can be a strategic move. 

HSAs offer triple tax advantages – tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. After age 65, funds can be withdrawn for any purpose without penalty, although ordinary income tax applies if not used for medical expenses. 

Invest in a Taxable Brokerage Account: While not tax-advantaged like retirement accounts, taxable brokerage accounts offer flexibility and no contribution limits. Focusing on tax-efficient investments and strategies, such as investing in index funds or ETFs with lower turnover rates, can help minimize tax liabilities. 

Consider Deferred Compensation Plans: If available through your employer, deferred compensation plans allow you to defer a portion of your income to a future date, potentially reducing your current taxable income and allowing for tax-deferred growth. 

Real Estate Investments: Investing in real estate can provide additional income streams and potential tax advantages. Real estate investments can diversify your retirement portfolio and offer the potential for both capital appreciation and rental income. 

By employing these strategies, high-income earners can enhance their retirement savings, positioning themselves for a more secure and comfortable retirement.  

Embrace the “Complexity": Your Next Steps

Wealth isn't just a number, and neither is worth. Wealth is a situation, an outlook, a feeling. What does being wealthy mean to you?  

Is it the security of knowing you can retire comfortably, spending about what you do today? Is it the ability to provide for your family and send your kids through college? Is it leaving a legacy, or having the financial freedom to pursue your passions? Knowing your personal meaning of wealth and worth can help you make more informed and satisfying financial decisions. 

Similarly, while it’s important to understand averages when it comes to retirement savings to celebrate your accomplishments, that does not mean you have to lower your expectations when it comes to maximizing your opportunity.

Don’t be afraid of the word complex, it simply means you’ve reached a level that you’re ready for the next level of financial advice; advice that is personalized to your exact situation and goals.

Are you ready to explore the full potential of your retirement savings? Do you want to ensure your financial plan is as robust and tailored as possible? Let's discuss whether a Wealth Manager is right for you.  

Download our net worth worksheet, or take our financial analysis to begin. And when you're ready, get in touch with a wealth manager to tailor a plan unique to your financial journey.