Personal Finance Checkup: How to Tell if You're On Track with Retirement Savings

Time To Read 3 MIN READ

Know Your Current Financial Status

The sooner you start saving, the more money you'll have at retirement.

The first step is knowing the status of your personal finances. "Getting from point A to point B, financially speaking, starts by knowing where point A is," says certified public accountant, Mark Noel. You need to consider your current income, assets, debts and expenses. If you've created a detailed monthly budget, you'll have a good idea about how much discretionary income you have to set aside for your retirement. You also need to know how much money you already have in all of your retirement accounts.

Gather Your Data

One of the big challenges with checking to see if you are on track with your retirement savings is the very real possibility that those savings are scattered among a number of different accounts. For example, you might have a traditional individual retirement account with one custodian, a Roth IRA with another, an old 401(k) with a previous employer and a pension/profit sharing plan at your current job. That doesn't even include any benefits due from Social Security, or from savings and investments you have outside of tax-advantaged retirement accounts. Gather your most current statements from all of your financial accounts. If you don't have current information from all sources your final analysis will be skewed. Contact the plan administrator for any account that's missing or out of date and ask for an updated statement.

Protect Your Personal Finance Needs in Retirement

Projecting your future financial needs is a iffy proposition, since no one knows what the economy will do in the coming years. "The best you can do is figure what you think you'll need based on current dollars, and make periodic adjustments as the years go by to account for changes in the cost of living," Noel says. Financial advisers disagree on how much you'll need for a comfortable retirement. Some say that retirees need 70 to 80 percent of their pre-retirement income; others don't believe that expenses drop significantly after retirement, and they advise their clients to prepare to replace 100 percent of their pre-retirement income. Fidelity Investments suggests accumulating at least eight times your pre-retirement income toward your retirement years. "Ultimately, you are the one who has to decide how much you want to live on," says Noel.

Know How Long You Have to Save

You need to know two important ages before you can effectively track your retirement savings; your current age and the age at which you want to retire. Subtract your current age from your projected retirement age to determine how many years you have to save toward your golden years. For example, if you are 28 years old and you want to retire by the time you hit 60, you have 32 years left to build your nest egg.

Make Some Assumptions

While you can't predict the future, you can make some valid assumptions based on past performance. For example, if you have a $10,000 five-year bank certificate of deposit with a 4 percent interest rate in your traditional IRA, you're safe assuming that $10,000 will grow by 4 percent per year for the next five years. It's a bit more risky to assume that the stock mutual fund in your 401(k) will continue to post 9 percent annual returns, but if it has a 30-year track record of earning between 8 and 10 percent per year, you at least have some basis for making that guess. By applying the projected growth rate to each of your retirement accounts based on the number of years remaining before you retire, you can get at least a general idea of how much your accounts will be worth at retirement, and how much more you need to contribute to meet your retirement goals.