In a survey, 39% of respondents said they hoped to retire with $150,000 to $250,000 in the bank. That’s nowhere near enough!
Why so low?
So the question becomes, are people just ignorant about how much they’ll need in retirement, or are they being realistic based on a poor current savings rate?
I tend to think it’s the latter. As we know, Americans aren’t saving. Even those who are tend to save 10% or less.
So it’s no wonder that the respondents weren’t aiming for the higher numbers: Anything more might just not be realistic.
Ignorance is (dangerous) bliss
Or maybe they really are ignorant about how much money they actually need to live on — which is probably more than they think — and how much Social Security will provide, which is probably less than they realize.
First of all, I don’t think most people have a handle on how much they spend. Not just in terms of keeping their spending under control. I think there’s a large contingent of people who simply don’t realize how much they spend total each month.
To be fair, I have only a basic idea. My next big task is to track my expenses for a month and categorize the spending to get a better sense of my problem areas. I haven’t done it yet because a) my finances have only finally started to settle down after the divorce and b) it’s going to be a pain.
But I do at least have a (very) rough idea of how much I spend. Based on what I keep back for day-to-day spending and what my last couple of credit cards bills were, I know that I need less than $4,500 in an average month. (That’s including my $600 mortgage, $1,800 in taxes and $150 put aside for car insurance. So that leaves a little under $2,000 for general spending.)
It’s important to have at least a basic idea of what you spend so that you know what you need to live on — because how else will you know what you need in retirement? And if you don’t know how much you need, how will you know how much to save?
The not-so-safe safety net
Or maybe it doesn’t matter what these people need because the question may be more about what they’re going to get. That is, anyone who thinks they can/will retire on $150,000 to $200,000, is clearly relying on Social Security. And that’s not going to be as much as they’re probably hoping.
I pay myself a yearly salary of $57,000,* and according to the Social Security calculator, I’ll only get about $2,000 at 67 (or $2,500 at age 70). The average salary in America is $48,251, which means the average American is looking at Social Security benefits of probably closer to $22,000 a year (or less)– and that’s assuming they even get their full benefits. According to Social Security, failing any legislation changes, payroll taxes will only cover 80% of projected benefits after 2035.
But let’s picture a best-case scenario here. Let’s say that they do get the full $22,000 a year. Somehow I doubt the average American’s expenses are under that amount, even with lower taxes, paying less for health insurance and being done with major expenses like a mortgage — assuming their mortgage is gone when they retire, which is no longer a sure bet.
A bleak future
So I think we can all agree that $22,000 probably isn’t enough to live on comfortably. And if they’ve only saved $250,000, then a 4% drawdown rate would mean an additional $10,000 a year. Which… I mean, from $22,000 to $32,000 a year, that’s a huge and very necessary jump.
But that’s still kind of iffy for the average spender. Not to mention that that’s still at the high end of the projected spectrum; it could be as low as $150,000, in which case they’d be looking at $28,000 a year.
Of course, a fair number of people will enter retirement married, which should about double Social Security income, depending on whether there’s parity in salaries. Even so, $56,000 to $64,000 falls below or just barely above the median household income of $63,378. And if Americans are barely saving and are even in debt while they’re still making $63,000+ a year… Well, it doesn’t look good.
Again, some of people’s costs will go down in retirement, but with the number of folks in serious credit card debt in this country, clearly Americans are used to spending as much or more than they bring in, regardless of income. I doubt retiring will really bring that to a screeching halt.
What does this mean? Probably that more people will go into debt and otherwise endanger their finances just to get by. I predict more (or at least continuing) credit card debt for basic expenses. Which I suppose is nothing new for the general populace, but it’s still pretty bad overall.
A look at my own situation
All this has made me wonder: How much will I need to retire? I honestly don’t know. I won’t know for sure until I get a better understanding of what I’m spending now.
Even then it’ll be difficult to project what taxes will look like if some of my money is coming from a Roth, some of my Social Security wages won’t be taxable (about 15%) and of course any changes to tax legislation that take place in the next 27-30 years. Nor will I know what my insurance and property taxes will look like that far in the future.
I think I can definitively say that there’s no amount I can realistically save that would put me in a position not to worry about money at all, which would require $60,000+ a year in retirement. And that’s my own fault for starting so late. All I can do now is sock away money as best I can.
But for the sake of argument, let’s say I want to keep my current levels of spending and do some traveling. So call it $50,000 a year. Given that I’ll have lower taxes (probably $1,000 a month or less) and will only be paying for property taxes/home insurance, $50,000 should be more than enough to live comfortably while having some money left over to put away against inevitable home repairs and other fun life surprises.
That means I’d need a little under $4,200 a month. According to Social Security’s 80% caveat (I always assume the worst-case scenario for myself), I’d get about $1,600 at age 67.
That means I’d need to withdraw $2,600 a month. For that I’d need $780,000 according to the 4% rule.
I got different results from different retirement calculators. Some said that I’m on the right track and will be fine. Others said that it’ll be tight or I’ll even be short. Personally, I’m going to assume that I won’t quite hit that mark.
So I guess I shoot a little lower. If I go for $40,000 a year, then I only need $510,000 in the bank. (“Only.”)
With compound interest, that’s feasible, since I think I can put at least $12,000 a year away into retirement. That’s $324,000 over the next 27 years, so compound interest should boost me up to at least $510,000.
Meanwhile, I’ll actually be shooting for $15,000 in the Roth/SEP-IRA each year, which would be $405,000 (not including interest). But I’m basing my projections on $12,000 because I think it’s a goal I can definitely hit.
I can live on $40,000 pretty well, I think. I might not travel as much as I’d like (or I’ll have to keep using travel rewards cards, which is fine), but I should be able to enjoy life without feeling too much of a pinch.
Of course, many, many things could change between now and then, but let’s think good thoughts, shall we?
How are you doing on retirement savings? Do you know how much you’ll need to retire comfortably?
*To be transparent, that isn’t what I make in a year. That’s what I pay myself out of the money I get for my contract work. Everything I make over my “salary” is considered company profit. Being an S-corp is weird.