Americans, as a whole, have not saved enough for retirement. Data from the nonprofit Employee Benefits Research Institute indicates more than half of Americans have less than $25,000 saved, and even worse, 28 percent have less than $1,000. At this rate, most Americans will not be able to cover one year of bills and incidentals during their retirement, let alone cover the rest of their lives. Even if you are one of the relative few that has a bit of a nest egg, do you have enough?
David Shucavage is a financial planner and president of the Wilmington, North Carolina, firm, Carolina Estate Planners, LLC. He regularly helps his clients build retirement portfolios. He’s found many people are unaware of the expenses they may have during retirement. For instance, “you should set aside $25,000 to $50,000 for emergencies like dental work or a new roof.” Just as you have emergency financial situations arise now, you will likely have such immediate and high-priority situations surface during retirement. As a baseline estimate, he suggests after your Social Security and pension, you should plan on saving around twenty-five times the amount you want for annual income.
How do you achieve this? “IRA’s are good but you shouldn’t be afraid to save money outside of the IRA… put some money into non-IRA funds or buying real estate, or into other equity markets,” says Shucavage. “Also, use the best strategy to maximize Social Security,” he adds. He explains how comparing various Social Security scenarios can mean a difference of $200,000 for some and it’s as simple as entering data into a software program that can help you find the most profitable option for you.
Every household is different, but there are a few universals to keep in mind when planning for retirement.
You’re not getting any younger
“Einstein said the most powerful force in the universe is compound interest… start young to gain the benefits of compounding,” he says. The difference in gains when you begin in your 20s or 30s versus if you begin in your 40s or 50s can be rather significant.
He also suggests saving 10 percent of your income for retirement. Let’s say you earn $50,000 — right around the median household income — and you therefore save $5,000 per year. Assuming a conservative 4 percent annualized return, you would have $829,402 at age 70 for retirement if you began at age 20 (before any social security). However, if you began at age 40, that number reduces to $307,859.
While most people understand starting young and placing more into a retirement fund allows interest to compound, many don’t see just how remarkable of a difference time has on your money. Mathematically, time is the variable by which rates on your money exponentially grow. Time is so significant that given that same 4 percent annual return, a person who invests a one time amount of $50,000 at age 30 earns a higher return than someone who invests $100,000 at age 50. The growth you see is well worth buckling down and cutting out a few extra expenses. Even if you reduce your cable bill by $10 per month when your in your 20s and put that money toward retirement, that’s around $20,000 for living expenses when you’re 70 years old.
Length of your retirement
He goes on to explain how about half of the 65-year-old retirees and prospective retirees who walk into his office today will return in their 90s. “Longevity is a risk of retirement…plan on living longer…you may work for 40 years and have 40 years [of] retirement.”
An ABC News publication discusses this sentiment — how the life expectancy in the U.S. keeps getting older and older. By 2050, the life expectancy may increase by about ten years for men and for women, they may reach an average age of 94. This means your savings may have to last you a lot longer. “While you’re working, you invest and grow your money and during retirement you withdraw and preserve,” says Shucavage. With people living as long as they are now, finding the proper balance is truly both an art and a science.
Income, lifestyle, and expenses
The amount of money you will need during retirement depends largely on your spending habits and the lifestyle to which you are accustomed. When people think of retirement, they often think of a paid off home, cars that are paid off, and limited expenses.
Shucavage says many of his clients have a mortgage payment during retirement, and that is okay as long as they plan ahead. He says you should “choose to put your money into the bank over a house… a house is not as liquid as other assets.” With mortgage rates being as low as they are, it’s wise to place your money somewhere you can access it if needed.
“Several of my clients spend money on their kids, if their daughter gets divorced or their son lost his job… they end up draining a significant portion to help their kids,” he adds. This is another expense people do not think about when planning for retirement.
The bottom line
When determining how much you really need for retirement, perhaps the best philosophy is as much as possible and, the more, the better. There are so many unknowns, and it is certainly more sensible to have too much saved, than not enough. By the time many of us get to retirement age, the world around us will be different — prices will be higher, the housing market may change, and advances in medicine may allow us to live longer than we ever thought possible. The best thing we can do is prepare for the future given the information we currently have, which tells us, it is time to start saving now.