The average worker believes they'll need about $500,000 to
feel financially secure in retirement, according to a Transamerica survey. But
there's a wide variance in opinion by generation. The median amount millennials
feel they need to save is just $300,000, while baby boomers are more inclined
to say they'll need about $750,000.
So which estimate, if either, is right? The answer is a
little more complicated than you might think.
There is no magic retirement number
Retirement planning, when done correctly, is highly
personalized. So if one person says they'll need $500,000 for retirement and
another believes they'll need $750,000, it's possible they're both right. Or
they could both be wrong. It all depends on how their estimates align with
their visions of retirement. But in the case of the examples above, it's likely
that at least some of the workers surveyed are underestimating the cost of
their retirement.
The average household headed by an adult 65 or older spends
about $47,579 per year, according to the Bureau of Labor Statistics, and
receives about $27,081 in Social Security benefits. That leaves it with about
$20,500 it must cover on its own every year.
If we multiply this by 30 for a 30-year retirement, that
amounts to $615,000 that the household members must save on their own. But in
actuality, they'll need more than this because inflation will drive up the cost
of living over time. Social Security benefits also rise over time, though these
cost-of-living adjustments (COLAs) often don't keep pace with inflation.
Based on this, it's unlikely that most people would be able
to live comfortably on $300,000 in personal savings, as millennials predict, or
even the $500,000 that Gen Z and Gen X workers believe they'll need. But again,
everyone's situation is different.
If a household plans to spend less than the average annually
or believes it will receive more from Social Security, that could change how
much it needs to save. If one or more members can count on a pension or other
government benefits, that could also reduce the amount they need to save on
their own.
How to know what you need
To give yourself the best chance at a comfortable
retirement, you need to have a good idea of how much you'll spend annually. The
first step is to think about what you plan to do in retirement. Will you travel
a lot or remain close to home? Do you plan to donate any money to charitable
causes? Will any of your hobbies require additional spending? Get as clear a
picture of your ideal retirement as possible.
Then, use this information to estimate how much you'll spend
annually. You can use your current spending as a baseline, but remember to
account for how your spending will change between now and retirement. You may
have to budget more for travel and hobbies and probably some extra for
healthcare, too. But you likely won't spend as much money on child care, and
you won't have to save for retirement once you're already there.
Try to come up with an average amount you believe you'll
spend per year and multiply this by the number of years you expect your
retirement to last, adding 3% annually for inflation. A retirement calculator
can do this for you. If you don't know when you want to retire, just choose any
age to start with. You can always adjust this later. As for your life expectancy,
plan to live into your 90s unless you have a good reason to believe you won't
make it that long. It's always better to overestimate than underestimate.
Plan for an average annual rate of return of about 5% to 6%
on your investments, even though your money may grow more quickly than this. If
all goes well, you might be able to retire a little earlier than you initially
planned. But if your investments grow more slowly than you'd hoped, at least
you won't end up off track.
Your retirement calculator should tell you approximately how
much you must save in total and per month to reach your goal. But you might not
have to do it alone. You'll probably have Social Security to cover some of your
retirement costs, and if you get a 401(k) match through your job, that'll also
reduce what you must save on your own. Subtract the money you expect from these
additional sources to determine what your monthly savings goal should be.
If you're not able to reach it for some reason, you might
have to revisit your retirement plan. Consider delaying retirement to give
yourself more time to save. Try a few different scenarios until you find a plan
that works for you.
It sounds like a lot of work, but once you get started, it
shouldn't take you that long. Then, once you have a suitable plan, all you have
to do is check in with yourself once every year or so to make sure you're still
on track. You should also do this whenever you experience a major lifestyle
change, like switching jobs or welcoming a new family member. Over time, it'll
become pretty routine, and you'll feel more confident that you're heading
toward the retirement you want.
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