What Grade Does Your Retirement Account Get?

Schools and parents have always taught students to strive for A’s and B’s.  In fact, it would be hard to do well in school without using grades as goals or milestones.  Unfortunately after school, grades fall off the radar.  By translating retirement savings into something as simple as a letter grade, retirement preparation can be seen in a new light.

The current rule of thumb is to save 10-15% of your salary throughout a career for retirement.  This general guideline often gets trumped by real life events:  kids, a new house, emergencies, etc.  In addition, television commercials are now touting a very large “retirement number” that often looks extremely intimidating and confusing.  With these generalized recommendations, it is often too vague to figure out if you are really on track for retirement.

Applying a letter grade to your savings will provide a new way to look at your retirement preparedness. This article’s model uses a simplified grading scale with each letter grade assigned a level of spending in retirement.  A grade of “A” means you have enough savings to replace 100% of your pre-retirement spending for the rest of your life when factoring in other income sources such as Social Security.  A grade of “B” would correspond to 90% of pre-retirement spending on down to a grade of “F” which would represent only 60% of pre-retirement spending.

What’s Your Grade?

To find your personal savings grade, you first need to calculate your savings multiplier.   For example, if you have $250K in savings and $90K in spending ($100K salary minus $10K yearly savings), then the savings multiplier will be 2.8 ($250K savings ÷ $90K spending = 2.8).   The table is broken down by 5-year age brackets and letter grades of A through F.  For a 45 year old, this savings level would be equal to a grade of B.

Now that your retirement savings have been graded, is it better or worse than expected?  If you received a poor grade, the easiest way to fix this would be to increase your employee retirement plan contribution percentage.  In addition, yearly contributions to an Individual Retirement Accounts (IRAs) would also improve your grade over time.

Our motto here at Rockbridge is “Building Wealth with Simple Disciplines” and we have been doing that for clients for the past 20 years.  Grading your retirement picture is just another way that Rockbridge can help you simplify and achieve your financial goals.

Assumptions/Customization

• Married couple earning $100K/year and saving $10K/year  ($90K/year spending)
• A real market return rate of 5%, which takes into account inflation
• Upon retirement, all assets are converted into a paycheck for life via an immediate annuity paying 6%
• Social Security makes up $36K/year of retirement income needs for this couple

To customize this table for your personal situation, compare your spending level to the model.  If expenses are greater than $90K/year, then you will need to save more than the table lists.  In contrast, if you have a company pension, you will be able to save slightly less.