(Total Assets minus Total Liabilities)
U.S. Department of Labor Employee Benefits Security Administration 33
SAVINGS FITNESS A GUIDE TO YOUR MONEY AND YOUR FINANCIAL FUTURE
4 . Retirement Savings
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Worksheet 4 can help you figure out how much you need to save each year towards your goal of a secure retirement. It estimates how much you should save as a percentage of your current annual salary to give you a savings goal. You can save through a retirement savings plan at work, on your own, or both. While the worksheet does not take into account your unique circumstances, it will give you an idea of how much to save each year and a clearer picture of your retirement goals. The sooner you start saving, the longer your savings have to grow.
As you fill out the worksheet, think about your plans including when you might retire, what savings you have, and how many years you hope to enjoy in retirement. Of course, your plans and circumstances may change, so update this worksheet periodically to reflect any changes.
The worksheet breaks the calculations into four steps. A 7 percent rate of return is used to keep it simple: remember investing involves risk, so investment returns, even assuming a diversified mix of stocks and bonds, go up and down and cannot be guaranteed. The worksheet, which uses a 3 percent inflation rate, increases your salary 3 percent each year but does not include any other increases.
Step 1 estimates what your annual salary will be at retirement as a result of inflation and how much savings you will need in addition to Social Security for the first year of retirement. (The next three steps will help you determine how much to save to have enough savings to last through your retirement.) To start, enter the number of years until you expect to retire on line 1. Next, enter your current annual salary – this is your total pay before taxes or other deductions. You can probably get this from your pay statement. Multiply your current annual salary by a projected salary growth factor from the box below the worksheet and enter the result on line 4. Select the factor that corresponds most closely to the number of years until you plan to retire. Multiply the amount on line 4 by 40 percent to estimate the annual income you will need for your first year of retirement.
Where does this 40 percent come from? On average, people need to replace about 80 percent of pre-retirement income for living in retirement. According to the Social Security Administration, Social Security retirement benefits replace about 40 percent of an average wage earner’s income after retiring.
This leaves approximately 40 percent to be replaced by retirement savings. However, keep in mind that this is an estimate and you may need more or less depending on your individual circumstances.
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