Tuesday, July 21, 2015

What's wrong with the goal "save for retirement"?

We all know we should "save for retirement." But if you don't make your goal more concrete than those three words, you may be financially unprepared for your golden years.

So let's come up with a number.

First, let's break down the time period. In this excellent article by David Marotta, he breaks down the retirement savings goal (having 23 years worth of living expenses by age 65) into smaller milestones at ages 25, 31, 35, 41, 46, 51, 55, 61, and 65. This makes sense-- it's a lot easier to stay on track for a goal if you break it down. It's similar to running a marathon. You don't just hit the pavement with the goal of finishing in under four hours without breaking it down into into mile by mile goals to make sure you're keeping the right pace. Without breaking down your savings goal, you'll only know you're going too slowly by the time it's too late.

Second, let's figure out how many years' worth of living expenses you should have saved. This chart summarizes the saving goals from Marotta's articles. (He assumes saving 15 percent of living expenses per year starting at age 25.)

Third, let's assign a dollar amount to our goal. To figure out how much your living expenses are for one year, you can just multiply your monthly budget by 12 if you've annualized your irregular expenses. (Click here if you need help setting up a monthly budget.) Find the next age coming up for you in the table above and multiply your annual living expenses by the number to the right of that. Now you have a concrete amount to be saved by a concrete date. 

I'm right on track! Now what? Quit reading this article and give yourself a pat on the back.

I'm behind! Now what? There are two ways to attack this problem, and you'll find it goes faster if you work at it from both ends.

Reduce your living expenses. The amount you need to save will decrease as you reduce your annual living expenses. Trim your expenditures where you can to make your goal more realistic. It's either cut spending spending now or cut spending way back in retirement.

This concept is also crucial for those who spend a long time in school (such as doctors, lawyers, etc.). Many find themselves graduating at an older age, but with a large income (and usually a large amount of debt). If you graduate at age 31, you'll find it much easier to meet your savings targets if you're annual spending doesn't balloon just because you suddenly find yourself with an income.

Increase your retirement savings. Figure out how much you need to save per month and work it into your budget. See our budget bootcamp if you would like detailed guidance on how to set up and use a budget. We generally recommend putting your savings into a Roth IRA.

Share - How do you make sure you're on track with retirement saving?

Marotta, John David. "How Much Should I Have Saved Towards Retirement?" http://www.forbes.com/sites/davidmarotta/2012/10/01/how-much-should-i-have-saved-toward-retirement/ Accessed July 15, 2015.


  1. Should I take into account that my home will be paid off before retirement?

    1. Obviously, it's your call, but I wouldn't. My parents and in-laws both have their houses paid off and comparing their annual budget to ours...they have significantly more expenses. Even though we have kids in the house to feed, clothe, entertain, etc. and they don't. I know part of it is health care. Even with medicare, there are still a lot more health expenses as you age.


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