Unless you plan on working until death, as 40% of baby boomers say they do, retirement planning is absolutely essential. According to data gathered by Money News, 87% of adults say they are not confident they have enough money for retirement. This leaves the remaining 13%, who feel completely confident about their retirement savings.
How much is enough to feel confident? Is $1 million enough? According to a 2014 report by USA Today columnist Rodney Brooks, it may very well not be. Here’s why.
Average retirement age
In the U.S., the average age at which a worker retires is 62 years, according to a Gallup publication. Assuming a life expectancy of 81 years, this means you have almost 20 years of expenses to cover with your retirement income.
Joe Heider, regional managing principal for Rehmann Financial Group in Westlake, Ohio, said to USA Today in early 2014, “It translates into $40,000 to $50,000 (annually) in sustainable revenue.” He adds that 10 or 12 years ago, when interest rates were much higher, it could translate into much more in annual revenue, but not in today’s market.
A household that’s used to living on a higher income may be in for a rude awakening when they have to reduce their standard of living dramatically to stay on track.
That $50,000 today is a relatively moderate amount of income — it’s pretty close to what a household at the median income level brings in. But when you account for inflation, it paints an entirely different picture. In 1995 (20 years ago), $32,188 in that time period has the same buying power as $50,000 now.
Think about 20 years from now. According to Buy Upside’s inflation calculator, $50,000 of today’s money has the same purchasing power as roughly $90,000 in 2035, assuming a 3% rate of inflation. Your same $50,000 will only be worth around $28,000 in 2035. Thirty years from now, the value of your $50,000 goes down to $20,000, and in 40 years, it is further reduced to around $15,000.
Costs of living
If you have no income during retirement, this money needs to cover all of your expenses: groceries, entertainment, transportation, and healthcare, just to name a few. Some workers make the mistake of thinking that they will be “all set” by the time they retire — their mortgage will be paid and cars will be paid off.
You may very well still have a mortgage payment during retirement, as many retirees do. According to data published by Money-Zine, more than one-third of retirees (38.9%) between the ages of 65 and 74 still had a mortgage in 2013.
With today’s average home value at around $180,000 (according to the most recent Zillow data), an average-price house in today’s market will cost you around $920 per month, plus property taxes and other expenses.
When you combine all of your costs and account for inflation, could you maintain your current standard of living during retirement with $1 million?
The bottom line
USA Today reports that 9 million Americans are at least at that $1 million mark. With only that $1 million, and no additional source of income during retirement, your standard of living may have to significantly decline.
Twenty years from now, when your $50,000 annually is worth $28,000, your monthly income will have the purchasing power of around $2,333, or $550 per week. At that income level, you can afford a home today with small mortgage payment (maybe $775), a maximum of $460 in car payments (on all of your vehicles), and then a remainder of $1,100 or so for everything else unless you want to dip into the pot.
Is it time to reevaluate your retirement plan? Having a strategy in place regarding how you are going to stretch your earnings beyond your working years is critical and will pay off in the long run. It is a balancing act that is individual to every household. Financial experts have various perspectives on how much to save for retirement, but most agree that starting as early as possible and saving as much as you can possibly afford is key.