Retirement

Am I On Track for Retirement? How to Tell at Each Stage of Life

Are you hitting major savings milestones, or are you lagging behind? Read more to find out if you're on schedule for retirement.

Planning for retirement can feel a lot like a road trip to the shore, with no map and only the sun to guide you. You know the ocean is that way, and you know you'll get there sooner or later, but at what time? And did you remember to pack your swimsuit?

Fortunately, analysts have crunched the numbers to come up with major milestones you can use to measure your savings progress. There's no one-size-fits-all number to indicate you're ready to retire, but by comparing your retirement investments with your current salary, your projected annual needs and your projected Social Security income, you can gauge how well you're doing.

Here's a rough road map to tell you if you're on track for retirement during each decade of your life.

Your 20s

If you're like most 20-somethings, saving anything at all for retirement might seem like a pipe dream. You're at the start of your career when your earning power is low; you're part of a generation with record levels of student debt; and you're four decades away from retirement, anyway.

However—thanks to the mystical mojo distilled from good financial habits and compound interest—the littlest steps can make the biggest impact if they're taken during this stage.

At this point in life, you need to set goals and get serious about pursuing them. If you can't afford to contribute to a retirement plan because you're paying down credit card debt or student loans, that's OK. Becoming debt-free is a worthy goal for anybody. But becoming financially independent is also an important objective, even if it takes a lifetime to accomplish.

Formulate a financial action plan that prioritizes debt payments and an emergency fund while also taking advantage of the best retirement perks available to you, such as maximizing your company's match on your 401(k) contributions.

Writing down and following this plan will help you start your career on the right foot and keep you focused when your indebted friends go on yet another Carribean cruise. If you stick to it, you'll thank yourself down the road.

Your 30s

Your 30s are a time to reflect on the progress you've made so far and to evaluate how far you still need to go. Do you have a safety net fund that will cover three to six months' worth of expenses if you lose your job? If not, you need one.

Are you still in debt? If you are, take a closer look at the types of debt you carry. If you haven't paid off all of your student loans yet, that's fine—especially if you're studying for a career with high starting salaries, such as a doctor. If you have paid your school loans off, even better. But at this stage, you should try to be free of discretionary debts, such as credit card debt or car loans. If you aren't, take a hard look at your spending habits and consider cutting back to pay down these obligations more quickly. Otherwise they'll put a drag on your retirement savings for decades to come.

As far as retirement savings go, there's no magic number to have saved at this point. But by 30, it should be a sizable amount. Experts suggest having between one-half to one times your annual salary invested in a diversified, stocks-and-bonds retirement account by 30, and one to two times your salary invested by 35. The more you put away during these years, the less you'll need to save later, and the more you'll have in retirement.

If you don't have this much saved yet, commit to increasing your retirement contributions. You should be putting an amount equal to 15% of your salary into a retirement account each year in order to keep up with these recommended benchmarks. Fortunately, many employers offer a 401(k) match that will help you reach this target amount. If you're unsure of whether your employer offers a match, ask someone from your HR department.

Retirement benchmarks

Your 40s and 50s

Typically, these are the peak years of your career, when you're earning the most and stand to gain the highest tax deductions from traditional retirement contributions. This is good, since you need to hit some significant savings milestones in order to solidify your progress toward retirement.

Fidelity recommends saving three times your salary at 40 years of age, four times at 45 and six times at 50.

If you're late to the game and find yourself trailing behind these benchmarks, the IRS wants to help. Individuals who are age 50 or over can begin making catch-up contributions to qualifying retirement accounts, beyond the regular contribution limits.

Your 60s

By 60, you should have at least eight times your annual salary set aside for retirement, according to Fidelity. The standard retirement age is between 65 and 67. However, whether you're ready to retire depends on how much you have saved, how much you'll need during each year of retirement and how much you expect to receive from Social Security or other sources, such as a pension.

Generally, people will need at least 80% of their final annual salary amount to support themselves throughout each year of retirement. This reduced amount is because they no longer need to contribute to a retirement plan, they no longer have to pay Social Security or Medicaid taxes (except on newly earned income), and they may face fewer regular expenses, such as the costs of a daily commute to work.

However, you will also likely face increased medical expenses, and how much you'll spend on a daily basis depends entirely on the lifestyle choices you make. If you decide your retirement years will be filled with European travel and fine dining, you'll need to have more saved.

Once you have 10 times your annual salary saved, you should be in good shape to retire, but only if you can count on other income, such as Social Security or pension payments, to supplement this amount. The standard rule is that if you can live on 4% or less of your retirement savings each year (adjusted for inflation), with other retirement benefits providing the necessary difference, you can enjoy about 30 years of retirement without running out of cash.

For example, if your household's final income amount is $70,000, you'll probably need at least $56,000 (80%) per year to sustain a similar lifestyle in retirement. If you have $700,000 saved, you may be able to safely withdraw 4%, $28,000, each year—half your target amount.

Let's assume you don't qualify for a pension, since those are few and far between these days. However, in this example, you do qualify for a Social Security check worth $2,000 per month, and your spouse qualifies for $1,800. This amounts to $45,600 per year, and a total of $73,600 when you add in your 4% retirement fund distribution. This puts you well above your minimum target amount of $56,000. In such a situation, you could choose to splurge on something you've wanted, but you might want to withdraw 1% or 2% less from your retirement savings, to provide padding later on if the market experiences a downturn.

The IRS provides a calculator to help you estimate how much you'll receive from Social Security each month. The longer you delay withdrawing Social Security funds, the more you'll earn per month, up to certain limits. However, some analysts expect people in their 20s and 30s today to only receive 75% of their appropriate Social Security benefits, since the program is running at a deficit. It's impossible to predict how legislatures will respond to this problem, but young people would be wise to bolster their own retirement savings.

It's far better to play it on the safe side and leave some cash to your kids or a favorite charity, rather than to run out of money midretirement.

Daniel Caughill

Daniel is a former Staff Writer at ValuePenguin, covering insurance, retirement and other personal finance topics. He previously wrote about compliance and best practices for K-12 school districts at Frontline Education.