We are all headed for retirement eventually, so you may be wondering, “Is my nest egg enough?” It’s a common question and one that causes a lot of anxiety. Because retirement finances are much more about prediction than they are about facts, it can be difficult to feel confident in your savings plan that you will have enough to carry you through your entire retirement. Random expenses like medical bills, long-term care, housing repairs, and emergencies are all part of life, so how can you prepare for those unpredictable expenses during your retirement?
While looking at your annual income will give you a rough idea of how much retirement savings you need, looking at your monthly expenses and then converting them to annual costs is a more accurate way to determine whether you’ll have enough savings to last through your life. Sorting out your cost of living is relatively simple. Begin by creating a monthly budget that lays out all your expenses and multiply that monthly number by 12. Be sure to factor in inflation and estimated medical bills as well. This should give you a general idea of how much you should save, but knowing a rough number is only one part of the entire picture.
How much you’ll need to save to retire varies widely based on your current routine and your desired lifestyle after you retire. Saving based on your current income considers your current lifestyle, but you’ll want to reflect on other factors as well. If you expect your expenses to decrease after retirement, aim for the lower end of the savings range when calculating. If you are hoping to travel, aim for higher calculations. It is important to think about your retirement budget and how much you plan on spending in your retirement. You may have to adjust some of your choices to reflect this change in income.
What are the Averages?
It also may help to get a sense of what other people have saved on average according to their age group:
- Less than 25 years old: $6,264
- 25-34 years old: $37,211
- 35-44 years old: $97,020
- 45-54 years old: $179,200
- 55-64 years old: $256,244
- 65+ years old: $279,997[1]
These numbers are averages and should not be considered recommendations. Most experts would agree retiring at 67 with under 300,000 in savings could keep you from fully enjoying your retirement, depending on your lifestyle. Everyone’s retirement goals, financial situation, and expectations are vastly different, and may require you to cover different costs, opt for different income and investment products, and approach funding your retirement differently than the “average.”
Time and Retirement Savings
Time is your most powerful ally for retirement savings. Small amounts invested early in your career can grow substantially larger than even big amounts invested later in life. Although many cannot afford to invest the recommended 15% of their salary toward retirement, investing any amount positions you to benefit from compounding interest quicker, and will eventually benefit your retirement income.
Time is also a factor when it comes to choosing a retirement age and estimating your expected lifespan. Because of the recent downward economy, even the wealthy have been worrying about their retirement portfolio. A few years of bad stock returns and unprecedented inflation [2] has rapidly depleted savings, forcing many people to adjust their age of retirement, with hope of recovering some of their losses. Meeting with a professional financial planner could offer some clarity on the timing of your retirement to optimize your benefits and income.
One Million isn’t as Much as You Think!
Consider a person with 1 million dollars in their retirement accounts. According to traditional wisdom, you may withdraw approximately 4% of your 1 million dollars in your first year of retirement.[3] This comes to $40,000 a year, which is a much lower figure than most retirees are probably expecting to see. Withdrawing 4% of the average retirement savings of $279,997 is only about $11,000 a year.
In Conclusion
When it comes to calculating how much you’ll need to save for retirement, there’s no right or wrong answer. Whether you plan on retiring early or wait a few years, you should consider your current savings and projected lifestyle, as well as your hopes and dreams, to decide if you’re on the right track to a long, comfortable retirement. If you are feeling unsure about your retirement income plan, and worry that you may not have enough for your retirement, reach out to us for a complimentary review of your retirement plan.
