How much should you have saved for retirement?
- Using the 4% retirement rule as a starting point, if you want $50,000 per year in retirement by age 65, you will need $1.25 million saved up.
- Social Security is a major source of retirement for 9 out of 10 Americans. Taking into account the average benefit a 65-year-old receives, the amount you need saved drops by 30% to 50%.
- By postponing your Social Security benefits to your full retirement age and working part-time while in retirement, you can reduce how much you need to save even more.
It seems to be that 65 is the magic number for retirement. The expected median retirement age for current workers is 65. If that’s the case for you and you want $50,000 per year in retirement, how much should you have saved? That is, no pun intended, the million-dollar question! Here are some guidelines to use to determine if you have saved enough and $50,000 per year is within reach.
The 4% retirement rule
This rule was first devised by Bill Bengen close to 30 years ago. Many retirees have relied on this rule to help determine how much they should spend in retirement. You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In later years, you adjust how much you withdraw to account for inflation.
So if you have $1 million saved for retirement, you would spend $40,000 the first year, and if inflation is 2% the following year, you would take out $40,800 that year. This is only a rule of thumb, and based on economic conditions, you may have to make some adjustments to your spending. Using this rule as a starting point, if you want to withdraw $50,000 a year, you will need at least $1.25 million saved up by the time you retire. That may seem high for some people, but if you take into account Social Security income, you may not need to save as much.
Sources of retirement income
If you are like most workers, your assets are primarily in your workplace retirement account, an IRA account, a brokerage account, a savings account, and the equity in your home. According to the 2022 Retirement Confidence Survey, here are the major and minor sources of retirement income that current workers expect to receive:
- 86%: Social Security
- 82%: Workplace retirement account, like a 401(k), 403(b), etc.
- 75%: Personal retirement savings and investments (brokerage accounts)
- 70%: Individual retirement accounts (IRAs)
- 68%: Work for pay
- 64%: Defined benefit or traditional pension plan
- 54%: Annuity or other financial product that guarantees monthly income
According to the Social Security Annual Statistical Supplement for 2021, the average monthly benefit a 65-year-old receives is $1,389.51 per month (for a total of $16,674.12 per year). Combined with spousal benefits, the average is $2,029.45 per month ($24,353.40 per year). Using these numbers combined with the 4% rule, here is how much you would need to save by age 65 if you want $50,000 per year.
- Single: $833,147
- Married: $641,165
Don’t have enough?
One of the most important questions to ask yourself is if your money will last for the rest of your life. According to the Social Security Administration, for those who are 50 years old, the life expectancy for men is another 25.69 years and for women 29.06. This means if you retire at 65, you will need your money to last another 10 to 15 years.
In addition, about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95. The older you are, the longer you can expect to live, increasing longevity risk. It is important that you have enough money saved so you don’t run out. To reach your retirement goals, the earlier you can start saving and investing, the better.
If saving $640,000 to $835,000 seems unachievable, you can look at retiring later as well as postponing your Social Security benefits. You also won’t receive full benefits until you reach your full retirement age (66 to 67). If you delay taking your benefits until you hit 70, you will get 132% of the monthly benefit since you delayed getting benefits for 48 months. The average Social Security benefit for a 66-year-old is $1,626.89 per month ($19,522.68 per year), about 17% more than what you would get as a 65-year old. The amount with spousal benefits is $2,365.50 per month ($28,386 per year).
While 65 is the expected median age to retire, 29% of workers expect to retire at 70 or beyond or not at all. Working part-time can considerably lower the amount of money you need saved. According to the U.S. Bureau of Labor, the average part-time wage for men and women over 25 is close to $20,000 per year.
Assuming you work part-time in retirement and postpone your Social Security by one year, here is how much you would need to save by age 65 to get $50,000 per year:
- Single: $261,933
- Married: $40,350
Working part-time and delaying Social Security by one year can make a big difference! This number assumes you work part-time for the rest of your life, however. While that is not likely, the purpose of this is to show you that creating a financial plan can give you greater clarity and peace of mind on how much you need saved for retirement. The 4% rule is not meant to be a hard-and-fast rule. You will need to adjust your withdrawals based on your personal situation. It is important to sit down and assess your spending and savings frequently so you don’t outlive your money and you can enjoy the life you want after you retire.
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