Are you saving enough to retire well? It depends on what your definition is — i.e., how much money you’ll need during retirement, when you plan to retire, and how much you have already saved.
So how much might the average worker actually need?
Assume a current income of $50,000 per year, an 8% return on your savings before retirement, 35% of your portfolio invested in stocks after retirement, inflation of 3% per year, and a life expectancy of 90 years. Not counting any other forms of retirement income (Social Security or pension benefits, for example), you’ll need between $1.3 and $2.5 million in your account when you’re ready to retire. That’s a big range and the decisions you make can dramatically affect how much you’ll need to save for retirement. For example, if you’re 50 when you start saving, you can cut the total amount you’ll need to save per month almost in half by delaying your retirement by five years. If you really want to retire at age 65, you can cut how much you need to save substantially if you scale back the retirement lifestyle you’re planning (for instance, from 85% of your current income to 75%). To determine how much money, you’ll need to have saved for your retirement, you’ll need to consider:
- How much do you already have saved? If you’re 50 years old and you have $250,000 in your retirement account, you won’t have to save nearly as much as if you had no nest egg.
- How many more years do you plan to work? The longer you are saving and earning returns on those savings, the more money you’ll have when you’re ready to retire. When you take into account the fact that your Social Security benefits will be reduced if you retire before full retirement age, delaying retirement makes even more sense.
- What is your estimated Social Security benefit? Most Americans will likely receive some sort of benefit from the program. It’s important to remember, however, that Social Security is just a supplement to your other retirement savings. How much you’ll need to count on those other savings depends on how long you worked (and thus paid into Social Security), what you earned, and when you’ll retire.
- How much income will you need in retirement? A huge factor that will determine how you answer this question is whether you’ll have a mortgage payment when you’re retired. For most people, a mortgage payment makes up about a quarter of their pretax monthly income. So if you plan to have your house paid off by the time you retire, you can keep all of your other expenses the same and still only need 75% of the income you needed when you had a mortgage payment. Of course, you’ll also want to think about the activities you want to pursue. If it’s traveling the world, you’ll need more income than if your plans are to stay home and spend more time with your grandchildren. Please call if you’d like to discuss this in more detail.