Measure Your Nest Egg Using the Right Yardstick

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If you’ve been wondering whether you’re retirement savings are on track, you may have searched to see what other people your age have saved. It’s what most people do… in fact, “average retirement savings by generation” is a very popular Google search.

And while that information seems like an important measure, that’s actually misleading. “Average” is NOT what you want to measure up against, because most people don’t have nearly enough retirement savings.

So when it comes to setting or measuring retirement goals, you want to avoid “average.”

The right yardstick is the one that reflects your specific situation – and only you (possibly with the help of a financial advisor) can come up with that.

Average Isn’t Really Average, Anyway

“Average” retirement savings numbers from different sources look wildly different for a reason: They’re calculated using different information from different sources. And that’s just the first issue.

The main issue with “average” is the calculation itself. To figure out average retirement savings, whoever is doing that adds up a certain number (let’s say 100) retirement account balances, then divides the total by that number (the 100 here). And if even one of those accounts has a balance really far off from the rest, it knocks the whole calculation out of whack.

For example:

  • Including “super savers” (people with very high account balances) or under-savers (people with very low balances) throws the average numbers off.
  • Including people with open accounts but no retirement savings in them (unfunded accounts) makes the average results too low.
  • Only including people with IRAs (individual retirement accounts) makes the average look lower because employer-based retirement savings plans like 401(k) plans allow bigger annual contributions. [Side note, this really bugs me.]

Those are just a few of the things that can make an “average” unrealistic.

But the real problem is that overall, most of us aren’t saving enough for a financially secure retirement. So using “average” retirement savings as your benchmark could leave you without enough money to retire comfortably.

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If You’re Looking for an Average, Look for the Best

When you’re trying to see if your own retirement savings measure up what other people have saved, averages have serious limitations on usefulness… but they’re really the only numbers out there.

That said, looking at the can give you a general impression of where you stand in the retirement savings picture, and offer up some insights about how we (Americans) are getting ready for the future. When you do use these numbers, try to find surveys that look at a lot of people – like 3,500 savers rather than 100 – to get a better picture.

You’ll also get a better idea if you look at the numbers that are broken down by things like:

That way you’ll be able to look at savings for people in a situation at least somewhat similar to yours.

TransAmerica is one of the best sources for a big picture view of retirement in the U.S. Here’s how things look according to their latest report, The 19th Annual Retirement Survey:

Check out some of the headline stats:

  • 55% of people expect to work after they retire
  • 11% of households have no retirement savings at all
  • Median retirement savings by generation:
    • $152,000 – Baby Boomers
    • $66,000 – Generation Xers
    • $23,000 – Millennials
  • 29% of people tapped into their retirement funds early
  • 77% are worried that Social Security won’t be there for them when they need it

That’s a pretty stark picture – but it doesn’t have to be your picture. You can take charge of your retirement goals and savings, and secure your financial future.

Make Your Own Yardstick

Looking at average, national numbers offers up some interesting information, but it doesn’t really apply to your own goals or whether you’re on track to meet them. To figure out whether you’re on track, you first have to figure out how much money you’ll need to comfortably retire when you’re ready. You’ll find clear steps on how to figure that out here.

Once you know how much you want to have stockpiled for retirement and when you want to be able to start tapping into the money, you have your finish line. With that, you can back into your tracking yardstick.

Take your nest egg goal and divide that by the number of years you have left until you reach your desired retirement age. For example, let’s say you’re 35 now, have $60,000 saved so far, and want to accumulate $350,000 by the time you’re 55. To get your annual savings goals:

  1. Subtract what you have from what you want, here $350,000 – $60,000 = $290,000. That tells you how much more you need to accumulate.
  2. Figure out how much time you have to save that amount, here 20 years (age 55 – 35 = 20).
  3. Divide your savings goal by your timeframe to calculate your annual savings goal, here $290,000/20 = $14,500.

When you know how much money you need to retire, and how much time you have left to build it up, you can easily track your progress along the way.

Remember, your investment choices will play a role in this, too. Some years, your investment returns will bring you closer to  your goal, so you won’t have to save as much (though it’s a good idea to stick to your plan). Other years, market downturns can set you back. Either way, you’ll still know where you are along the path to retirement, and how far there is to go.

Need help figuring out your retirement nest egg target or the best ways to reach it? Contact me here.