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Are You on Track for Retirement?

Here's how much you should be saving, by age

On Track for Retirement


It's important to make sure your finances are trending toward a comfortable retirement.

An important question people often ask me is if they are on track to retire, and that can be a difficult question to answer. According to investment firms T. Rowe Price and Fidelity, you'll need about 12 times your pretax salary to retire. For instance, if you are earning $60,000 a year, you'll need about $720,000 if you want to retire at age 65. According to T. Rowe Price, you should have 2 times your annual income saved by age 40, 6 times by 50, 10 times by 60 and 12 times by age 65.

A rule of thumb I've personally been following for two decades came from the 1996 best seller, The Millionaire Next Door. It defines your wealth equation as follows:

  • Age x pretax income / 10 = expected net worth.

Thus, if you are 50 years old and making $60,000 a year, your expected net worth should be $300,000 (50 x $60,000/10).

A better rule

The problem with these rules of thumb is that they are all based on income rather than how much money one needs to live on in retirement. I define financial wealth in years rather than dollars. The formula I offer is:

  • Financial wealth = net worth / annual expenditures above Social Security.

So, for example, if you had a net worth of $300,000 and needed $10,000 a year above your Social Security checks to live on, you have 30 years of financial wealth and might be financially independent at age 65. (Although you should probably not claim your Social Security until 70, in order to get the biggest payout.) On the other hand, if you needed $20,000 annually above Social Security, you'll need to either keep working or learn how to live on less.

By my definition, net worth is the total of what you own less how much you owe. Though I exclude all personal possessions, I do include the value of the home in my equation. That's because you probably can't sell your other possessions for much but, later in life, you can always sell the home and downsize or even (as a last resort) take out a reverse mortgage.

The implication of my rule of thumb is that you'll probably need about 30 times the amount you plan to withdraw if you want to retire at age 65 and have a long life expectancy. The good news is that this formula is not directly based on what you make, but rather what you spend, so the best way to get on track for retirement is to reduce expenditures today. Try using the following as a savings goal:

Age 40: 9 years of financial wealth; Age 50: 18 years of financial wealth; Age 60: 27 years of financial wealth; Age 65: 30 years of financial wealth.

Now for some more good news, I've found that people who worry (or are even a bit pessimistic) about having enough to retire are typically better off than those who are confident about having enough to retire. The worrying causes people to save while the optimism causes spending. If you are reading this piece, you are likely concerned about retirement, and that in itself is a great sign that you may be on track.

Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.