Americans aren't doing a terrible job of saving for retirement, but we could be doing a lot better. One of the main goals of retirement should be financial comfort — and you can't achieve that if you need to nickel-and-dime everything and are constantly in fear of running out of money after you retire. Having said that, here's where the Average American stands, and what you can do about it if you're among the millions who are lagging behind.
How are we doing?
According to one study, the median balance of workers' retirement accounts — including 401(k)s, IRAs, etc. — is $63,000. By age group, the data looks like this:
- People in their 20s have a median retirement savings of $16,000.
- For people in their 30s it's $45,000.
- For people in their 40s it's $63,000.
- For people in their 50s it's $117,000.
- For people in their 60s it's $172,000.
Source: Transamerica Center for Retirement Studies.
These may seem like pretty decent numbers. However, when you consider that these savings need to last throughout a potentially lengthy retirement, the data tells a different story.
One widely used rule of thumb states that you should be able to comfortably withdraw 4% of your retirement savings each year, with cost-of-living adjustments in subsequent years, and your money should last as long as you do. Well, using this "4% rule," the average 60-something could only manage $6,880 in annual income from their savings. Even when factoring in Social Security (which we'll get to in a second), it's not likely to be enough.
What's more, the average American worker knows they aren't saving enough. The median American worker estimates they'll need to save $1,000,000 for a comfortable retirement, and just 15% strongly agree that their current savings habits are building an adequate nest egg.
Social Security will probably not be enough by itself
Most experts say you'll need about 80% of your pre-retirement income in order to sustain your lifestyle after you retire. This isn't set in stone, and it can be more or less, depending on your situation. For example, if you're planning to sell your house and downsize, your income needs could be less. On the other hand, if you've been planning to travel frequently after you retire, you could need much more.
Either way, Social Security is unlikely to provide you with sufficient income all by itself — unless you're planning to drastically cut back on spending.
As a simplified example, let's say your average annual salary throughout your career was $60,000 (adjusted for inflation). Well, Social Security benefits are calculated based on an inflation-indexed average of your 35 highest-earning years. In this example, your monthly income of $5,000 is applied to the following formula:
- 90% of the first $856
- 32% of the amount greater than $856 up to $5,157
- 10% of any amount above $5,157
So, in our example, the Social Security benefit at full retirement age should be about $2,096 per month, or 42% of your pre-retirement salary — far short of the 80% recommendation. Unless you want to dramatically lower your standard of living after you retire, you'll need to make up the difference from your savings.
If you'd like an estimate of how much you can expect from Social Security, you can view your Social Security statements by creating an account at www.ssa.gov.
So, how much will you need?
Again, the answer to this question is different for everyone, but for simplicity's sake, let's assume you're aiming for 80% of your pre-retirement income. Here's a quick way to estimate your retirement "number."
First, write down your household income and multiply it by 80%, or 0.8. This will tell you how much income you'll need in retirement.
Retirement income = Household income X 0.8
Next, subtract your estimated Social Security income, which you can find on your annual Social Security statement. If you're married, don't forget to include your spouse's benefit, or the spousal benefits to which he/she is entitled to, based on your work record. This is the income you'll need from savings.
Income from savings = Retirement income - Social Security income
Finally, using the 4% rule I mentioned earlier, divide this amount by 0.04. This will give you a good idea of your savings target.
Savings target = Income needed from savings ÷ 0.04
For example, let's say that you have a household income of $100,000, and you estimate that your and your spouse's combined Social Security benefits will bring in $35,000 per year. That means you'll need retirement income of $80,000, $45,000 of which will need to come from your savings. Dividing this amount by 0.04 reveals a retirement savings goal of $1.125 million.
How to catch up
The good news is that there's still time to make a big difference in your savings, even if you're just a few years away from retiring.
You can save up to $5,500 this year in an IRA, and an additional $1,000 if you're over 50 years old. 401(k) limits are even more generous — you can choose to defer $18,000 of your salary into your employer's plan, and a $6,000 additional catch-up contribution is allowed for savers over 50.
It's not just about the money you save, either — it's how you invest. Most of your savings should be invested in high-quality stocks and ETFs; here are some ideas to get you started. Good retirement stocks will provide you with downside protection and low volatility while still allowing your nest egg to grow over the long term. Over long periods of time, stocks have averaged total returns of nearly 10% per year, and some stocks many consider to be "boring, old people's stocks" like Johnson & Johnson and Procter & Gamble have done even better than that.
The bottom line is that it's better to over-prepare than under-prepare when it comes to retirement. After all, the last thing you want to do in retirement is run out of money after just a few years because you didn't plan well enough. At that point, you won't get any do-overs, so the best thing you can do is start saving and investing today.
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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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