August 4, 2017

Average Retirement Savings: Are You Ready?

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Saving and sacrificing now can mean a good lifestyle during retirement. How much do you need for retirement?

You'll likely need 75% or more of your pre-retirement income annually. This just covers housing, health care, and daily living expenses. You still must account for your particular lifestyle.

If you have big plans for retirement, it may mean sacrificing now. This may prove to be difficult. It's hard to give up instant reward for savings down the road.

Having a plan is the key to success. Not sure what you need? Read on and we'll help you learn how much to save.

Don't worry if you haven't started yet. It's true you should start early, but it's never too late. You'll just have to adjust your strategy.

Do You Have Enough Savings for Retirement?

No two people will have the same retirement savings plan. Personal finances differ based many factors, including:

  • Amount of income
  • Amount of debt
  • Lifestyle

However, you can use the below guidelines as a basis. This doesn't mean beat yourself up if you don't meet the threshold exactly. If nothing else, it gives you a goal you can work towards.

Benchmark: Here are savings benchmarks you can apply to your own life.

  • By age 30: 1 years' worth of salary
  • By age 40: 3 years' worth salary
  • By age 50: 6 years' worth salary
  • By age 55: 7 years' worth salary
  • By age 60: 8 years' worth salary

We discuss how to keep pace with your rising income below.

What Is the Average Retirement Nest Egg?

According to a survey done by Transamerica, people in their 60s have an average of $172,000 saved for retirement.

This number may seem surprising, given the guidelines above. By age 60, you should have an average of 8 times your salary saved. For example, if you make even $50,000 per year, that's a total of $400,000 saved. The average savings isn't even cutting it close.

In the same study, 82% of responders don't plan to retire at age 65. Also, more than 50% plan on working after they retire.

Sadly, almost half of those surveyed counted on social security income. This can be the reason for the measly average retirement nest egg.

How Much Should You Save for Retirement Each Year?

The numbers are scary. How can you live on just $172,000 if you retire at age 65? It would mean a lot of sacrifice. So how do you prevent this from being your reality? You must save at least the minimum necessary each year. The amount depends on your current income. At the very least, try:

  • Maximizing your 401K contributions to obtain the maximum employer contributions
  • Maximize your IRA contributions ($5,500 for 2017)
  • Increase your savings for every decade for retirement

Keep reading to learn just how much you need.

What Percentage of Your Income Should You Save?

The golden rule is to save 10-15% of your annual income for retirement. You should also live an 80/20 lifestyle: 80% of your income covers your spending and 20% covers savings/investments.

The 20% savings includes:

  • Retirement savings
  • Emergency fund savings
  • Getting out of debt

Holding onto high interest debt only depletes the value of your savings. Paying off debt now helps increase retirement savings.

Tip: We recommend the following retirement savings plan.

  • Max out your employer-matched contributions in your 401K
  • Stock your emergency fund until you reach 6-12 months' of expenses saved
  • Consistently pay off high interest debt until it's gone

Once you have a fully stocked emergency fund and no debt, increase your retirement savings. You should always keep a goal of saving 15% of your annual income.

For example, a person with $65,000 per year income should strive for $9,750 savings per year, or $812.50 per month.

What Is the Average Age for Retirement?

The average retirement age is between 62 and 65. The difference is due to the cost of living in different states. The top costs for those in retirement include:

  • Proper taxes
  • Homeowners insurance
  • Health care costs

How Much Does the Average Person Make in a Year?

According to the Census Bureau, the median household income was $56,516 in 2015.

The average person needs 70% of their pre-retirement income during retirement. This means an average of $40,000 per year. This number doesn't account for inflation or life expectancy.

Can You Retire at Age 40?

Looking at these numbers, it seems impossible to retire at 40. Given the current life expectancy of 79, that's 39 years of retirement income.

Retiring at 40 requires a life of sacrifice. First, you can't have a mortgage. You must own your home outright.

You also won't live a life of luxury before or after retirement. Retiring at 40 doesn't mean traveling the world and living luxuriously. It means meticulously planning for the future.

Can you live on 3% of your retirement portfolio? That's what it takes to retire at 40.

For example, if you have $1 million saved, you should live on only $30,000 per year. That being said, your portfolio must account for inflation and the higher cost of health care as you age.

How Do You Figure Out Your Net Worth?

Your net worth is the driving factor for retirement. It helps determine if you will be among the 50% of 60-something-year-olds who plan to work past retirement age. The higher your net worth, the easier your retirement may be.

Your net worth is your total assets minus your total liabilities.

But what does that mean? Here's a simple calculation you can use:

  • Assets = Total investments (cash, savings, investments) + Current value of your home + Current value of other owned real estate + Value of any other assets (jewelry, furniture, art, vehicles)
  • Liabilities = Total mortgage balance (1st and 2nd) + Student loans + Credit card debt + Installment loans
  • Assets - Liabilities = Total Net Worth

How Much Do You Get for Social Security?

In 2016, the average person received $1,360 per month in Social Security. Even if you retired today, that isn't a guarantee of what you would receive. Your benefits depend on your earnings history and age at retirement. For example, not working a full 35 years could decrease your earnings.

The Social Security Calculator can estimate your benefits. Keep in mind that if you collect early, your earnings decrease. The full retirement age today is 66. Collecting before that may reduce your benefit between 5 and 6.7%.

Note: We don't recommend relying on Social Security income. The Baby Boomer generation is entering retirement. This could quickly deplete Social Security's reserves. Plus, people are living longer. This has further depleted the SSA's ability to keep up.

Many in their 20s and 30s may never see a dime of Social Security. We'd prefer if you thought of it as a bonus rather than a sure thing.

Bottom Line

We hope you understand the importance of saving for retirement. Even if you don't have the net worth described above, every little bit matters. As interest compounds, your money grows. Get out of debt. Grow an emergency fund and save for retirement. Social Security may or may not be there. Consider it a bonus if you get it.

It's a delicate balance between sacrifice and fun. Look at your budget. Do you allot 20% of your income for savings? If not, start figuring out how to make it happen. The earlier you start, the happier you'll be in retirement.

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