Do you find yourself wondering, “Am I on track for retirement?” It’s a fair question! Though it might seem like a difficult question to answer, there are three different retirement benchmarks that can help.
Salary Multiples, the 4 Percent Rule, and Monte Carlo simulations can all help you see if your retirement plans are on track. Let’s start with the simplest rule of thumb and take a deeper dive into three different ways to test your financial plans!
A Multiple of Your Salary
The simplest way to see if you’re on track for retirement is to use Salary Multiples. These are sometimes referred to as savings benchmarks by age. The idea is that you multiply your salary by a certain amount to determine an approximate goal to have set aside in retirement savings.
Let’s look at some of the common benchmarks below:
| Age | Multiples of Your Salary |
| 30 | 1x |
| 40 | 3x |
| 50 | 6x |
| 60 | 8x |
The benchmarks outlined in this chart indicate that you should have 1x your salary saved by 30, 3x by 40, and so on. A couple earning a household income of $100,000 should aim to have $100,000 saved at 30, $300,000 saved by 40, and $800,000 saved by 60.
Do those benchmarks feel overwhelming? To take some pressure off, you can use a simple compound interest calculator to see how much your savings will grow. For instance, let’s say you have $100,000 saved and never add another penny. With a 7% real rate of return, your money will grow to around $200,000 in just 10 years.
You also want to remember that your salary generally increases with age. That means that not only are you actually going to continue contributing to your savings, you will likely be able to contribute more.
Pros of Salary Multiples
Salary Multiples are a very easy way to gauge your savings progress. Since most of us know our salary, it’s very easy to see if we are on track or not.
Cons of Salary Multiples
While this is a great rule of thumb to allow people to quickly evaluate their retirement savings, it’s not specific enough as you get closer to retirement. It also doesn't factor in raises or other salary fluctuations.
The benchmarks can also shift depending on who is publishing them. Some financial companies err on the side of caution, while others do not. For instance, some benchmarks suggest having 6x your salary at 60, while others suggest as much as 11x. That could lead to some confusion for savers.
Another complication of the Salary Multiples is that there are very different benchmarks for people who are looking to achieve Coast FIRE or retire early.
That’s why we think of Salary Multiples as an entry point for assessing your progress. However, if you really want to answer the question “Am I on track for retirement?” you probably need to use a more precise measurement.
4 Percent Rule
The 4 Percent Rule is a powerful benchmark to help you answer the question “Am I on track for retirement?” Using this rule, you can estimate the amount of spending you can do in retirement. Retirees can withdraw 4% of their retirement savings in the first year of retirement. After that, you continue to withdraw 4%, adjusting for inflation.
Let’s see the 4 Percent Rule in action. Imagine you have $2 million saved for retirement. According to the rule, you can withdraw 4%, or $80,000, in the first year. Then, let’s say inflation is 3%. The following year, you can withdraw $82,400 without worrying about draining your portfolio.
So how do you know if you have enough saved? You will need to decide if 4% can cover your expenses for a year. Using the example above, a retiree who has enough saved would need to cover their yearly household expenses with $80,000.
Are you worried that $80,000 isn’t enough? Approximate your yearly expenses with your favorite budget app and multiply by 25. That should help you approximate how much you need to save if you plan to stick to the 4 Percent Rule.
Pros of the 4 Percent Rule
One of the biggest benefits of the 4 Percent Rule is the mindset shift it requires. Oftentimes, we get very focused on salary. However, if your main focus is what you earn, you are overlooking a very important variable. When you determine how much money you need in retirement, you need to focus on what you plan to spend.
That’s where the 4 Percent Rule comes into play. Since the rule is based on expected expenses, not income, this rule can help people see the bigger picture. This perspective shift is necessary for effective retirement planning.
Cons of the 4 Percent Rule
There are some drawbacks to the 4 Percent Rule. Some people learn about the 4 Percent Rule and see it as a guarantee. It is not. No one can predict the future, so it’s best to view this rule as a guideline. Volatile market conditions or unpredictable personal situations can certainly impact how much your portfolio grows and how much you need to spend each year.
There are other limitations to the 4 Percent Rule. If you have your sights set on early retirement (or just want to live a very long time), you want to remember that the withdrawal rate is designed around a 30-year portfolio. As a result, you may need to adjust your withdrawal rate to extend your portfolio life.
Fortunately, some people say the 4 Percent Rule may be too conservative. That means that if you use this guideline, you may oversave for your retirement.
Having more money versus not enough can be a benefit, but it all depends on how you look at it.
Monte Carlo Simulations
Let’s explore the most precise way to answer the “Am I on track for retirement?” question.
A Monte Carlo simulation in retirement planning is a mathematical model. This model uses statistical probability to estimate the likelihood of achieving your retirement goals by simulating various possible market conditions and outcomes. In turn, you can assess the potential risks and rewards of different investment strategies over your retirement time frame.
This simulation addresses factors like inflation, market volatility, and life expectancy. Essentially, a Monte Carlo simulation provides a probability-based outlook on whether your retirement savings will be sufficient based on a range of potential scenarios.
A Monte Carlo simulation can obviously be very complex. That’s why having a tool like ProjectionLab can help. You can use ProjectionLab to build a living model of your finances over the course of your lifetime. Thanks to the behind-the-scenes number crunching, this model shows you a whole spectrum of possibilities.
I use it to look at different investment strategies and drawdown options and it honestly gives me more peace of mind on my retirement journey.
Pros of Monte Carlo Simulations
Monte Carlo simulations are excellent ways to ensure that investors are considering a wide array of possibilities. By looking at a variety of potential outcomes, you can readily see if you are on track. Not only do you have a better sense of your progress toward your retirement goals, but you can also see how well you are managing financial risks.
In short, Monte Carlo simulations can help you see how your portfolio will hold up in a variety of possible markets.
Cons of Monte Carlo Simulations
Still, there are drawbacks to Monte Carlo simulations. It’s important to remember that Monte Carlo simulations can’t predict everything.
Monte Carlo simulations are set up by people–investors, advisors, or platforms. The input can influence the output. The assumptions that are put into the model determine the different scenarios that the simulation generates. As a result, dramatic market crashes and other incredible outliers may not show up in these simulations.
Another drawback of Monte Carlo Simulations is how complicated they seem. Reviewing a simulation is much more involved than using a rule of thumb like the Salary Multiples Rule or the 4 Percent Rule. As a result, many investors become overwhelmed or many advisors charge a pretty penny for help navigating them.
But you can actually invest without a financial advisor.
Final Thoughts on Am I On Track For Retirement?
One of the most important things to remember is that you’ll be able to track your progress toward retirement most closely as you age.
When you’re young, you can start by taking essential steps in the right direction. Aim to invest 20% in low-cost index funds and let the power of compound interest work for you. Additionally, you want to consistently live below your means. Doing these things will set you up for success in the decades to come.
As you get closer to retirement, you can use the 4 Percent Rule or Monte Carlo simulations to better assess your progress. A tool like ProjectionLab can demystify retirement by addressing a variety of factors and market scenarios.
It’s important to remember, though, that retirement benchmarks can’t predict the future. That’s why adopting smart financial habits, such as budgeting, investing, and goal setting, can help you build financial resiliency.
Are you on track for retirement? What retirement guidelines do you use?
Please let us know in the comments below.
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