No One Really Knows How Much Money to Save for Retirement

The famous game show with Regis Philbin

Who wants to be a retirement millionaire? | Source: ABC

It’s a money question that has no definitive answer: “How much should I save for retirement?” An exact figure is so elusive because everybody’s financial situation is different, and crystal balls are always cloudy if you look close enough. We routinely hear specific dollar amounts we’ll need to make sure we don’t tarnish our golden years, but are any of them right?

Back in the good old days, a million dollars was enough money for retirement and pretty much anything else you wanted from life. If you had a million dollars you were considered rich. You had enough financial independence to pursue your bucket list. Those days are seemingly long gone. Now, a million dollars feels like a starting point when trying to determine how much you’ll need for retirement. The general retirement calculation we’re told goes something like this: enjoyable retirement + health care costs + inflation = at least a $1 million nest egg. Never mind the details, just keep working, spending, and saving until you one day hit that million mark — or die trying.

You don’t have to look far to find evidence that Americans are listening to these colossal savings targets. A recent study from Transamerica Center for Retirement Studies (TCRS) finds 25% of workers estimate they’ll need at least $1 million to feel financially secure in retirement. Twenty-nine percent of workers, the largest group in the report, say they’ll need at least $2 million, representing a 53% surge in four years. In 2011, only 19% of workers said they’ll need at least a $2 million nest egg to feel financially secure in retirement.

Even reaching the $2 million mark may not be enough money for retirement, depending who you ask. American investors told Legg Mason, a global asset management firm, they’ll need an average of $2.5 million in retirement to enjoy the quality of life they have today. Before you know it, the new retirement number will be $3 million, or perhaps $5 million, just to be on the safe side.

I think it’s fair to say many of us will not save $1 million or more for retirement. In fact, when we hear figures like these, which often ignore our own personal situations, they can cause us to feel hopeless and give up on the retirement saving process altogether. Over half of Americans have less than $10,000 saved for retirement, and about 75% of Americans over 40 are behind on saving for retirement, according to GoBankingRates. Meanwhile, the average 401(k) and IRA balances at Fidelity totaled only $87,900 and $90,100, respectively, at the end of 2015. However, you probably don’t need $1 million to retire either.

Instead of becoming overwhelmed by how many millions you’re told you should have before retiring, start with the other side of the equation, your expenses. More specifically, focus on the expenses you can control. You really don’t know how much money you’ll need for retirement until you pay attention to your expenses. Naturally, the less money you spend on an annual basis, the less money you’ll need to retire.

It’s not a matter of sheer luck that some people are able to retire early, or retire with significantly less than $1 million. These people understand that your expenses determine if you can truly afford retirement. If you spend only $30,000 a year, compared to the Joneses who spend $60,000 a year, you don’t need to save as much as the Joneses. For example, multiplying your annual expenses by 25 is one of the simplest — yet helpful — retirement planning calculations in existence.

If you spend $30,000 per year, you would need roughly $750,000 in income producing assets, compared to $1.5 million needed if you spend $60,000 a year and plan to continue spending that much throughout retirement. Note these calculations ignore Social Security payments, which will likely be around in some capacity when you retire.

The 25-times-your-annual-expenses rule certainly isn’t perfect, but it’s a realistic start to knowing how much you should save for retirement. Sure, we don’t know exactly how much we’ll spend on an annual basis in the future, but most of us can cut several major expenses like housing, transportation, and food if we truly tried. Tax strategies can be learned to maximize savings, and side jobs or alternative sources of monthly income like real estate can reduce our retirement numbers even more. The responsibility to make your golden years shine are on you.

Follow Eric on Twitter @Mr_Eric_WSCS

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