One of the first things people do once they get serious about planning and saving for retirement is look to a retirement calculator to find out how much they need to save for retirement. There’s nothing wrong with that. However, every person’s situation is completely different. What might be the right amount for one person will not be right for everyone.
For example, someone who is happy staying home and gardening during retirement will need less than someone who plans to travel or play golf frequently. These are the types of things a retirement calculator might not take into consideration before giving you a certain amount you will need for retirement.
How Much Do You Need To Retire Comfortably?
You may have heard some try to answer this question very broadly. For example, one popular notion is that you’ll need $1 million dollars in savings to retire comfortably. Another is that you’ll need to generate 80% of your income after you retire. So, if you brought home $100,000 dollars a year during your working years, you would need to get $80,000 dollars a year from your investments during retirement.
Remember, this is just a ballpark figure. Each person’s situation will require different amounts based on the lifestyle they plan to enjoy in retirement, among other factors.
Determining How Much You Should Save For Retirement
One good way to begin calculating the answer for yourself is to perform a budget analysis. This involves identifying all the expenses you will have once you retire, as well as those you expect to go away once you retire, such as your FICA tax, commuting costs, and perhaps your mortgage payments.
Next, you’ll need to determine how much income you will have coming in the door once you stop working. For example, an important source of retirement income will be your Social Security benefits. You should estimate how much your Social Security benefits will be based on claiming your benefits at the optimal time.
The decision of when to start taking your Social Security benefits is one of the most important retirement decisions you’ll make. With a proper plan, and by carefully coordinating your Social Security benefits with your other retirement resources like your savings, 401(k), or IRA, Social Security can be the cornerstone on which you build a comfortable retirement. The right age will vary from person to person, and it will be determined by considering many factors like your age, earnings, retirement goals, and more. That’s why it is important to work with a qualified financial advisor to come up with a plan to help you maximize the benefits available to you—preferably an advisor who specializes in retirement income.
Perhaps more importantly than trying to identify the lump-sum amount you’ll need for retirement is to have a strategy that can help reduce your exposure to risk and uncertainty, so you can try to avoid any costly mistakes as you near retirement. You’ll need a plan that aligns with your individual retirement goals.
Your Goals Are Really Where Your Retirement Plan Should Begin
Take a moment to imagine that it’s your first day in retirement. You no longer have to worry about work and can begin enjoying the retirement you’ve always envisioned. What is it that you will want to do with your time?
Will you want to go out and make a major purchase like a yacht or a second home? Or will you be more focused on being able to enjoy and maintain your present lifestyle? Perhaps instead of splurging on luxuries, you might be more focused on things that will bring you happiness and peace of mind. Maybe you will want to travel, dine out more often, visit friends and family, and pursue your favorite hobbies and pastimes.
The fact is, once most people take the time to envision and identify their retirement goals, they realize their goals are income-based. In other words, they are goals best achieved through a retirement strategy that gives them steady streams of income.
So, instead of focusing on some magic number that you need to have saved up before you retire, it can be just as important to determine the best ways to help preserve your hard-earned savings so you can use it to help generate income in retirement.
That’s why in recent years, more and more Baby Boomers across the country have switched their financial focus to investing for income. It’s why many are turning to financial advisors that specialize in helping clients make this important switch.
If you would like to learn more about Investing for Income, read The Definitive Guide to Retirement Income which highlights 9 Things You Need to Know about Retirement Income.
How Much Does The Average Person Have In Savings When They Retire?
An article on MarketWatch.com examined this topic back in December of 2020. It stated that according to the 2019 Survey of Consumer Finances, the average retirement savings for all families was $255,130. That article also warned that if you use this number as your guide for how much you’ll need for retirement, you could end up being unprepared.
The article echoed our sentiment that the amount required for each person or couple to be able to enjoy a more comfortable retirement will depend on many factors, including the age at which you plan on retiring, the types of activities you plan on enjoying, and your life expectancy. If you consider that you could end up spending up to 30 years or more in retirement, you’ll probably agree that a retirement plan focused on asset preservation really makes sense.
Can I Retire At 55 With $300,000?
As you can imagine, the answer to this question is not straightforward. The age at which you choose to retire and the amount you will need will vary from person to person. Keep in mind that if you retire at age 55, you will be responsible for paying for your own health insurance for 10 years. Generally, Medicare is available for most people at age 65. However, younger people with disabilities and those with end-stage renal disease can qualify earlier.
You will also need to consider that you won’t be able to rely on your Social Security benefits until you reach age 62 at the earliest. Claiming at age 62 would mean that you’d receive a reduced benefit compared to waiting until full retirement age, which is right around age 67 for most people.
Another important consideration for anyone thinking about retiring early is longevity. As of 2020, the average life expectancy in the US is 77.8 years. So, if you retire at age 55, you’ll need to ensure that your $300,000 can last for 23 years or longer.
For decades, the investment advisory community has promoted the “4% Withdrawal Rule” in retirement planning. The 4% Rule proclaims that investing with a standard retirement portfolio comprised of 60% fixed-income investments like individual bonds and 40% equities should be able to sufficiently support a 4% annual withdrawal rate—without prematurely depleting client funds over their lifetime.
So, if we buy into this logic and follow the 4% rule, that should allow you to withdraw $12,000 each year without depleting your $300,000 before you reach age 85.2 So, the question becomes, is $12,000 each year enough to fund the lifestyle you’ve always envisioned for your retirement?
Most likely, retiring on $300,000 at age 55 will only allow you to enjoy the basics of what life has to offer. Also, what if you are one of the lucky ones who lives to age 90 or longer?
A Word of Caution about the 4% Rule
The 4% Withdrawal Rule may have made sense from the mid-1970s through the late 1990s when interest rates were high. Today’s low-interest rate environment, however, has made it much more challenging for retirees to be able to rely on the 4% rule with a great degree of success. For example, a report written in 2013 by economists from Morningstar, Texas Tech, and the American College titled “The 4% Rule Is Not Safe in a Low-Yield World” predicted that if the economy entered a low-yield, high investment valuation period, that more than 50% of the 4% Retirement Withdrawal plans would fail.
The low-yield, new normal investment environment is a challenge that retirees must now address and overcome when investing for long-term retirement success. This is why it is important for those nearing retirement to work with a financial advisor who specializes in retirement income.
What Is The Average 401(k) Balance For A 65-Year-Old?
According to Businessinsider.com, the average 401(k) balance for those aged 65 and up is $216,720. If you are thinking that this amount might not be enough for most to enjoy a comfortable retirement, you are not alone. This is especially true if that money is invested in the stock market and we experience a major market downturn as you enter retirement.
On the other hand, if those funds are invested in income-generating investments designed to help protect your savings, it could be enough. That’s because the interest and dividends generated by your investments could provide you with a reliable source of income well into your retirement. If you don’t need that income at that time, you can reinvest it and grow your money the old-fashioned way through the magic of compounding interest.
If you’ve conducted an internet search for the question, “How much should I save for retirement?” and feel like you’ve fallen short of the magical amount some “expert” says you need, take comfort in knowing that the amount you save might not be as important as the approach you take with your retirement savings as you begin your final descent into retirement.
By making the switch to investing for income ahead of retirement, you could help preserve what you’ve worked so hard to accumulate. This way you can use it to help establish steady streams of income that can help you enjoy the retirement you’ve always envisioned.
If you haven’t done so, you can find an Income Specialist from The Retirement Income Store who specializes in retirement income. Plus, if you schedule a complimentary call with one of our Income Specialists, you will also receive our free Retirement Income Kit—which is filled with resources that explain how you could start Investing for Income vs Growth.