How to Tell if You're Investing Enough for Retirement

During your working years, it's important to plan ahead for when you leave the workforce. Social Security benefits only replace around 40% of pre-retirement income, so you're going to need retirement savings in a 401(k) or other tax-advantaged account such as an IRA at a brokerage firm.

But how do you know if you're saving enough to have a secure retirement or if you should be worried about having an empty bank account as a retiree? Here's what you need to do to make sure you're on track.

Figure out how much you'll need for retirement

The first step to making sure you're on pace to have enough retirement savings is to figure out how much money you'll actually need as a retiree. There are a few different ways to do that. One of the simplest is to assume you will need 10 times your final income. To use this approach:

• Estimate how much your income will be before you retire. You can do this by taking your current income and assuming about a 2% annual raise. So if you're making $50,000, assume you'd be making $51,000 next year and $52,020 the year after that, going on until the age when you expect to retire.
• Multiply that ending salary by 10. If your ending salary was $52,020, for example, you would need $520,200 saved for your senior years.

Estimate your likely future returns

Next, estimate how much you expect to earn from your investments. Figuring out this number depends heavily on what you're invested in, and it can be hard to predict -- but you can look at the past performance of your investments to get a good idea.

If you are invested in an S&P 500 index fund, this type of investment has historically produced around 10% average annual returns, so that would be a pretty decent estimate. But if you have individual stocks in your portfolio or are invested in a target-date fund or other type of mutual fund or index fund, you should be able to see the fund's track record to roughly estimate the returns you could end up with. Keep in mind, though, that past performance is no guarantee of future results.

See if you're investing enough each month

Once you know the amount you need and your likely returns, you can use one of many online calculators to see how much you need to invest to hit your retirement goals by your target date. For example, Investor.gov has a savings goal calculator that will tell you how much to invest each month to accomplish a particular financial goal.

You can input your savings goal -- such as $520,200 -- the amount you already have invested, the number of years until you plan to retire, and your projected rate of return to see what to invest each month. So, for example, if you had $0 saved, assumed a 10% average annual return and wanted to retire in 20 years with that amount, you would see you need to put aside $756.57 per month.

Doing this calculation is simple and easy, and completing each of these three steps takes just a few minutes but will give you clear insight into whether you're on track for retirement. If you are, then just keep at it. If you're not, you may need to look for budget cuts to increase your retirement savings so you can have the security you deserve as a retiree.