Simple Math to See if You Have An Age-Appropriate Nest Egg

Have you ever asked yourself if you are on track to retire by considering if your nest egg is age-appropriate? Jonathan Clements tackles this question in his Wall Street Journal article "Simple Math to See if You Have An Age-Appropriate Nest Egg."He provides readers a table “Exit Strategy” that can quickly answer this question if you are 20 years away from retirement.

 

Exit Strategy
If you're 20 years from retirement, here's how much to save depending on your current wealth.
Savings-to-Income* Annual Savings Rate
1 27%
2 20%
3 12%
4 5%
5 0%

 

*Example: If you have a $120,000 nest egg and $60,000 in income, the Savings-to-Income ratio is 2.0.
Source: Northstar Investment Advisors

The simple formula provides you with an annual savings rate dependent on your current accumulation of assets for retirement. For example: if you have $100,000 currently saved for retirement and your current annual income is $50,000 then your savings to income ratio is 2.0. Therefore, for the next 20 years you will need to save 20% to retire comfortably. In addition, he discusses the opportunities of quitting early for those individuals that have been savers and have managed to accumulate retirement portfolios four or five times their current income. Clements also provides suggestions for individuals who haven’t saved enough. Those that haven’t saved enough are encouraged to “…scale back your retirement goals, delay retirement or both.” However, he does warn that these are projections based on individual’s income increasing every year between now and retirement at the same rate as inflation. He further explains that if income increases much faster than inflation, it would result in making retirement tougher, especially if you are 10 years or less away from retirement. Unless that entire raise is applied to retirement savings it would be difficult to “replicate that lifestyle in retirement.” To find out if you are on track go to the following link.

Retirement Calculator