Are your retirement savings on track?

Use this simple test to find out.


Maybe you’ve just started to save for retirement, or maybe you are about half-way there, or perhaps you think you are ready now.  You can use the simple test below to find out whether you have saved enough to date and/or what savings rate you need to get to your goal.  It is based on getting 50% of your working wage for retirement income from savings.  You will also have income from Social Security and perhaps a pension, but see notes that follow the chart.  If you want 100% of your working wage for retirement you would have to more than double the numbers on the chart.


Multiply your current annual pre-tax wages by the factor below to determine the minimum savings you should already have in retirement funds.* (The chart is based on savings growing through your last working year to provide 50% of your final working year’s wages for an inflation-adjusted retirement income that will last thirty years before exhausting savings.  You may also have retirement income from Social Security and a pension.)


Years till


Savings rate as a % of current wages

























































Example.  Mary has an income of $50,000 a year from her work.  She wants to get 50% of her working income for retirement, and she wants that amount to be adjusted upward every year for inflation so it’s 50% of her last year’s actual working income before retiring.  She has about 15 years till she would like to retire, and she’s saving 10% of her gross wages from work, so the factor from the chart above is 6.3.  At this point in time she should have at least 6.3 x $50,000 = $315,000 in retirement savings.


If Mary doesn’t have that much, she should consider retiring later and increasing her annual savings.  Retiring later provides large gains, not only because she can save more, but also because both her pension and Social Security will increase greatly.  Most people need some help from a professional financial planner at some point.  If Mary is far from her savings goal, she should get such help now.  Remember, retirement may be thirty years or more of unemployment, and trying to live on Social Security alone can make those years very difficult.


Some savings should be set aside for purposes other than regular retirement income and therefore should not be considered as savings for the purpose intended in the chart above.  So, if you are saving some money for a new car or if you have savings for an emergency, those should not be included in an analysis to determine if you have saved enough for a regular inflation-adjusted income in retirement meant to last a lifetime.  You can greatly refine your retirement analysis to consider things like these as well as mortgages, part-time retirement work, investment allocations, insurance, long-term-care and many other factors with the programs on, many of which are free.


Helpful Notes:  Here are some points to consider when making retirement income estimates:


Social Security.  The Social Security estimate you get every year (or from is likely to be a fair estimate although the government may increase payroll taxes and/or increase the age to get the full retirement benefit.  The quote is in today’s dollar values.  You need to use today’s dollar values in an analysis of this kind.  You don’t want to try and escalate values for inflation.  If you will retire earlier than 62, you will need additional savings to support the years until you start Social Security.  Almost everyone benefits from delaying Social Security to age 66 if savings are sufficient.


If you are very close to retirement, you should see a professional financial adviser, preferably someone with a CFP degree.  Since Social Security will probably continue to be adjusted for inflation, it may well be your best investment.  Delaying the start of Social Security to 70 can pay handsome dividends for a higher income spouse and a surviving spouse that had lower income, but you will need enough savings to support those years between retirement and age 70 without the Social Security income, and at least one spouse needs to live beyond age 80 to make this an attractive alternative.


Pensions.  Pension contributions are more difficult to estimate if not quoted as an investment balance.  If a pension is quoted as an investment balance, simply include that amount as part of your savings above.  If the quote is a monthly or annual amount, it not only depends on whether you will continue to work for that employer but also whether your employer will even keep the plan.  It also depends on whether the quote is in future dollars or in today’s values as well as if it’s a fixed amount for life or is cost-of-living-adjusted (COLA) as are some government pensions.  Quotes are usually based without spousal beneficiary, so you’ll have to adjust if married.  If you have serious doubts about any of these elements, it would be wise to use only about half of the employer’s quote.  If it’s a COLA pension, it’s likely you can use the quote directly after adjusting for spousal benefits, but if it’s a fixed pension (as for virtually all commercial pensions), and if it’s in today’s dollar values (ask your employer to convert if not), multiply the quote times your current age divided by 100 to estimate the amount you can spend from your pension in the first year.  This provides the savings you will need to compensate for inflation in future years.


Example:  $10,000 annual fixed pension in today’s values x 50 years old (now) divided by 100 = $5,000.  This is the annual amount of your pension you can use for expenses and taxes while saving the rest to provide inflation compensation as the pension loses value over the years.  My own fixed pension lost 30% of its purchasing power in the first ten years—in a period of relatively low inflation.


Savings that should not be included in an analysis to determine lifetime retirement income.


Emergency Savings.  You will need emergency savings before and after you retire.  There is no way to determine an amount for uncertain events, but for many, savings of 6 months of income will suffice.  That can help if you lose your job, your elderly mother needs financial assistance, your divorced daughter needs help for care of her children, or whatever.


Example:  Emergency savings might be $50,000 annual wage x ½ year = $25,000.


Savings to replace expensive things that wear out.  I call these “Replacement Savings.”  It’s simple to calculate though tough for many to follow in spite of the large financial gains over buying on credit.  Here’s how you do it.  Estimate the cost of the item as well as its useful years of life.  Every year you should be putting away a savings amount that is the cost divided by the useful life.  Your cumulative replacement savings to date should be the annual savings times the number of years of life you’ve already used. 


Example:  You want to replace a car that, after trade in, would cost $20,000.  You estimate you would keep it 10 years.  The amount you should put into new savings this year would be $20,000 divided by 10 years, or $2,000.  If the car you are replacing will last 6 more years, then you effectively have used 4 years of its life now.  Therefore, the amount you should have already saved is 4 times $2,000, or $8,000.   You can read more about this in “Getting Started in a Financially Secure Retirement,” John Wiley & Sons, 2007 and articles on


Money for replacement reserves should not be in a qualified retirement account unless you are nearing 60 when you can start penalty-free withdrawals.  If you are in that position, then you will have to increase the amount of such savings to cover the income tax on withdrawal.  So if you expected to use  an IRA in retirement to cover these reserves, and your future tax rate would be 20%, the amount you would subtract from the IRA balance would be $20,000 divided by (1 – 20%) which equals $20,000 / 0.8 = $25,000.


* Assumes most retirement funds are in qualified accounts (401(k), IRA, etc.) or you have low tax rates.  Also:  5% wage growth, 8% pre-retirement return, 6% post-retirement return, 4% inflation and 30 year retirement.


Henry K. (Bud) Hebeler