Figuring out how much money you need to retire has perplexed many future retirees. With improvements in medicine, a report recently published by Lancet reflects that life expectancy is expected to rise by 4.4 years over the next decade.
Special Note:
The same report predicts the United States will linger far behind other high-income nations, reaching an average lifespan of just 79.8 years by 2040. The report found that the average life expectancy in the U.S. would only increase from 78.7 years to 79.8 years between 2016 to 2040, which would actually lower the U.S. in ranking – from 43rd to 64th – on the report’s list of 195 countries.
Living longer has many benefits. After you quit working, you will have more time to spend with your loved ones and more time for hobbies and travel. You will have more time to tick off the things on your bucket list.
Indeed, the years after retirement can be very rewarding if you plan well, starting now.
However, the years spent in retirement can be miserable if you run out of money. Unfortunately, the research shows that many Americans have not saved enough for retirement. Far to many expect to receive the bulk of their retirement income from social security.
Most Americans Are Unprepared For Retirement
As I said in a previous post, the middle class is vanishing. Most people are not saving near enough money to retire comfortably. In fact, according to a report by Northwestern Mutual, Americans are unprepared for the financial realities of retirement. Their research reflects some pretty alarming numbers. It shows that:
- One in five Americans (21%) have NO retirement savings at all.
- One in three Baby Boomers (33%), the generation closest to retirement age, only have between $0-$25,000 in retirement savings.
- Three-quarters of Americans believe it is “not at all likely” (24%) or only “somewhat likely” (51%) that Social Security will be available when they retire.
- Nearly half (46%) of adults have taken no steps to prepare for the likelihood that they could outlive their savings.
It’s clear that many Americans have had their head in the sand for far too long.
Don’t Rely Solely On Social Security
With the Social Security fund running a deficit in 2018, and the Trustee projecting that the program will continue running larger and larger deficits until it becomes fully depleted in in 2034, don’t count solely on social security for retirement. After 2034, recipients can expect at least a 25% cut in their benefits. Social Security will still be around, just don’t expect as much as you were promised.
Clearly, you will need something more resilient like a 401(k), a Traditional IRA, or a Roth IRA that you can count on to last you during your golden years.
How Much Do You Need To Save For Retirement?
There is a simple formula, the “4 percent rule”, which says that, in most cases, you can safely withdraw 4 percent a year from your retirement savings portfolio and not run out of money.
Using the 4 percent rule can help you come up with a figure, or “magic number”, for how big your retirement portfolio needs to be.
To figure out how much you need to retire, simply divide your annual spending by 0.04 (or multiply it by 25) to reach your target retirement savings.
For example, let’s say you typically spend about $30,000 a year. Then using this formula, you would need to save $750,000 ($30,000 divided by 0.04).
Is the 4 percent rule exact? No, it’s not. Depending on your situation and spending habits, you may need a lower or a higher withdraw rate.
If the number you calculate seems too large and unreachable, don’t worry. Luckily, if you live abroad in one of these countries you won’t have to save as much.
Still, the 4 percent rule is a good way to get a general idea of how much you need to save for a comfortable retirement.
The point to remember is that the amount you will need to retire is directly related to your expenses.