Written by Ben Carlson

…Rules of thumb can be helpful as a baseline for setting expectations but theyrequire context and nuance to be effective in the real world. This is especially true for something as complex as retirement planning. It can be a frightening process when you consider all of the variables involved. Unfortunately, as overwhelming as the entire process of planning for retirement can be, you still have to make a plan and monitor your progress as you age.

Investors Business Daily published a table from JP Morgan Asset Management last week that sought to show how much you should have saved at certain ages relative to your income level using some fairly simple assumptions:

There’s no one-size-fits-all with this type of thing but this is another baseline to give people an idea of where they stand in terms of retirement preparedness.

My problem with this type of analysis is that it only considers one side of the equation — your income level…

[In] figuring out how much money you need for retirement…You don’t figure out a number. You figure out how much you spend and save. It’s pointless to try to figure out how much you’ll need in savings or income if you don’t have a good understanding of how much it costs for you to live.

Where you are in your lifecycle will obviously have a lot to do with how you think about these factors.

  • In your younger years, it’s almost impossible to plan ahead for the exact amount you’ll need based on the exact amount you’ll spend when you retire.
    • There are simply too many variables to consider, many of which can and will change by the time you do decide to accept that gold watch and retire.
    • At this stage in the process, it’s more important to develop good saving habits than anything. The great thing about having a high savings rate is that it means you’ll have less income to replace during your retirement years. Saving more when you’re young is a built-in margin of safety for your future self.
  • As you approach retirement you’ll have a much better grasp of how much you spend on an annual basis and what your wants, needs, and desires will be in your retirement years.
    • From those numbers, you can come up with a much better estimate of how much of a nest egg you’ll need to cover your annual expenditures and needs from your portfolio.
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