Am I Saving Enough? Or Saving Too Much?

It’s tough to make predictions, especially about the future, as baseball legend Yogi Berra would put it. It’s even harder to make even broad guesses about the future of your money.

Will you stay employed as long as you want? Make enough? Get raises and promotions?

That’s just earning money. Investing money is even harder to predict. Stocks seem to go up until they don’t. Bond investors guess wrong on the direction of interest rates all the time.

How can an ordinary mortal even hope to understand how much to save and how to make it grow enough to fund retirement?

The good thing is that you don’t have to exactly right about some future living arrangement and its costs. You just have to not be horribly wrong.

That means saving adequately for long periods of time and investing prudently to protect the purchasing power of that money decades down the line.

Feeling queasy? Okay, here are some broad contours to help out.

Generally speaking, most financial advisors say to go for double-digit savings rates, not single digit, when it comes to tax-deferred retirement plans such as a 401(k).

That means 10% is really the floor, not the ceiling. Saving the minimum to get the company match, usually 3%, probably isn’t going to get you where you want to be. Vanguard Investments, for instance, says to target 12% to 15% of salary.

Now, does that mean your check is 10% smaller? Not necessarily. The immediate tax savings from deferring income will add to your contribution dollar amount, as will a company match.

You might get 10% in dollars put into your 401(k) but really only set aside 6% of pay. It won’t hurt to do more, but it may not be required. So you could start out at a “virtual” 10% and let your raises get you there for real over time.

Time is money, naturally

Another major factor here is time. If you started your retirement saving and investing in, say, your 20s, you have the immense power of compounding working in your favor. Not as much if you put it off until 45 or 50.

One common way to figure out if you’re on track is to look at your savings balance and divide by your current salary. Typically that’s a multiple such as four or five times your salary by age 45 up to eight to 10 times by age 65. (It varies by financial advisor firm.)

Another is to pick a final number, say $1 million by age 65, and do the math to find out how much you need to save starting at what age to make it happen. Remember, though, that by the time you get to 65, $1 million will probably spend like half that amount due to inflation.

Ultimately, the point is to start saving and start doing the calculations, including Social Security income and the cost of healthcare in retirement. A financial planner is usually the best route to getting all these numbers in a format you can understand.

Nevertheless, anyone can start saving now and get on the path to a fully funded retirement. All it takes is that first step.

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