- Only 4% of American workers today are covered by a traditional pension plan, down from 60% in the 1980s.
- People are increasingly on their own to save for retirement and the amount needed to live comfortably in old age continues to rise.
- Saving money on a regular, consistent basis for retirement and setting aside a percentage of one’s salary is the best approach.
If you’re wondering how much money you need to retire, the short answer is: a lot.
The old axiom that people need to save $1 million for retirement is outdated. That’s especially true when you consider that maintaining a middle class lifestyle in America these days is estimated to require an annual household income of $150,000 to $180,000. In some of the larger U.S. cities such as New York and San Francisco, households require $350,000 of income to live what is traditionally thought of as a middle class life.
Maintaining a decent standard of living in retirement is not easy. Unless you plan to head to a foreign sun destination such as Portugal or Costa Rica, where the cost of living is much lower than in the U.S., you had better start saving your pennies and investing them.
How Much Money Do I Need to Retire?
There is no end to the theories and calculations offered online about how much money a person needs to retire, or how to calculate and reach one’s savings goals. However, a general rule of thumb is that people should save enough money so that they can live on 80% of their salary in retirement. Based on this theory, a person who earns $100,000 at the time they leave the workforce should have enough money saved and invested to generate $80,000 in retirement income. And to generate $80,000 a year in income, a person would need to have a nest egg of $2 million, assuming a 5% annual return on their investments.
Note that this calculation does not factor in social security payments. The average monthly Social Security benefit as of April 2022 is $1,666, or nearly $20,000 per year. Factoring in social security means that the total amount a person needs to save would be less than $2 million. However, based on today’s standards of living, most retirement experts encourage people to save $1.5 million to $2 million for retirement over the course of their working life — more if you want to live better in retirement than you did while punching the clock, i.e., traveling, buying big ticket items such as a boat, or splurging on a golf club membership, and so on.
Savings By Age
Another popular retirement calculation involves the amount a person should have saved based on their age. For example, by age 30 a person should have one year of their annual salary invested for retirement. By age 65, they should have the equivalent of 10 times their salary saved. These types of measurements are popular as they allow people to benchmark themselves or track how they are doing in terms of their retirement savings. However, there is an easier way to gauge how much you should be putting away for retirement. Many financial experts recommend simply setting aside a set percentage of your paycheck for retirement — anywhere from 10% to 25%.
Often referred to as “pay yourself first,” this retirement plan sees people set aside a portion of each pay for retirement before they pay any other bills or expenses. This can be automated so that every two weeks or once a month on pay day, a set amount of money is redirected into a 401(k) plan or other retirement account. Many employers will set-up this type of savings for their staff. Retirement experts used to recommend that people set aside 10% to 15% of their pay for retirement during their working years. But today, that percentage is closer to 20% to 25%, as the cost of living steadily rises. While saving a quarter of your take home pay for retirement might be difficult depending on your other financial obligations and family life, you should try to save as much as you can afford to while working.
Why It’s Important to Save for Retirement
Retirement isn’t what it used to be. Today, only 4% of Americans employed in the private sector have a traditional pension plan known as a “defined benefit plan” that is provided by their employer from the time they retire until they die. That’s down from about 60% of American workers who were covered by a traditional pension in the 1980s. The only workers who are likely to have a defined benefit pension today are people employed by the government or those who work in heavily unionized industries, such as the airline and automotive sectors. The rest of us have a 401(k) plan and are fortunate if our employer contributes to it at all.
A growing number of Americans are on their own when it comes to their retirement and must save on their own. And on this front, the news is not good. A report issued in 2020 by the U.S. Federal Reserve found that the average retirement account balance in the U.S. was just $65,000. That’s woefully inadequate when one considers that medical costs for a couple over the course of their retirement are estimated to be a minimum of $200,000, and likely much more. Clearly, people need to do a better job of saving and investing for retirement.
The good news is that it’s never too late to start saving and you can start small. Putting away even a few hundred dollars a month can make a difference over time. The important thing is to acknowledge and address your own personal situation regarding your retirement goals and savings. And to save as much money as possible for the day when you’re unable to continue working.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
