Retirement is becoming an increasingly far-off goal for many Americans. Many factors contribute to this outlook, but one is that most people don’t know how much retirement savings they will need. So, the plan for many is to continue working.
Although the average retirement age for Americans is 61, 54% of adults expect to work past the traditional retirement age of 65, according to a report from Transamerica. But that decision is often based on assumptions about how much retirement savings is needed. And that number is different for everyone.
To determine how much actual retirement savings you will need, you’ll need to figure out how much money you’ll have coming in and what your expenses will be. There are many approaches to determining this figure, and there is no definitive “best” approach. But here are a few options to get you started.
How to Make Retirement Work
Start by adding up all your current monthly expenses, including mortgage or rental payments, insurance, food, car, travel, debt, and anything else you pay regularly. Multiply that monthly total by 12 to get your annual number. That’s the minimum you need to live on each year.
“The quick and dirty way to see if you’re on track is to have about 10 times your earnings by retirement if retiring around 65,” says Michael Solari, CFP, principal with Solari Financial Planning, LLC. For example, if you currently earn $70,000, aim to set aside ten times that, or $700,000.
“The halfway point is about your late 40’s/50’s, so you should be close to 5 times your earnings by then,” he says.
Not quite there yet? Solari says, “Don’t worry if you’re behind. Many of my clients increase their savings once their kids are out of the house, which can help get you there quicker.”
So, if you have kids still at home, your current monthly expenses may be higher than what you’ll need in retirement.
Using 4% as Your Guide
To arrive at your retirement target, says Lyle Solomon, an attorney with the Oak View Law Group, “you can use the 4% rule to compute the magic number at retirement. If a person plans to retire in the next 25 years, multiply the projected retirement expenses (minus Social Security payouts) by 25.” That’s the number you should save by the time you retire, he says.
Social Security benefits play a role because the monthly payment can reduce what you need to save. You can request an estimate of your own Social Security benefits to factor into your calculation. The monthly Social Security payment you receive can be subtracted from your monthly expenses.
For example, if your current monthly expenses total, say, $6,000, and your estimated Social Security benefits at your full retirement age (typically 67) are $2,000, you need to be able to cover $4,000 a month in expenses. On an annual basis, that’s $48,000. To get your retirement savings figure, multiply by 25 and get $1.2 million. That’s the savings you need to retire once social security payments kick in.
Brennon Bowen, CFP, AIF, executive vice president of ProFi, explains the calculation slightly differently. He suggests looking at it this way:
Desired Annual Income – Expected Annual Social Security – Other annual income sources = What you need your retirement portfolio to provide/4%.
“The 4% rule of thumb basically states that if you withdraw 4% or less from your retirement portfolio each year that the funds have a very high chance of not running out before the end of retirement,” Bowen says.
The calculation here might look like this:
$72,000 – 24,000 – 10,000 = $38,000 / 4% = $950,000
The $950,000 is what you would need to have saved to retire and be able to cover your expenses without a problem.
Other Retirement Savings Factors
This calculation does not take into account other factors, however, which include:
- Whether you want to keep working. Continuing to earn an income can reduce the amount you need to have set aside to live off of, Solomon points out.
- When you want to start receiving Social Security payments. You may be able to start receiving payments as early as age 62, though they will be discounted if you start withdrawing before your full retirement age.
- The rate of inflation. As prices rise, your monthly expenses will rise, too, causing you to deplete your savings at a faster rate than you may have anticipated.
- Healthcare costs. In 2021, healthcare costs rose by 4.5% a year, says Aviva Pinto, CDFA, CDS, managing director with Wealthspire Advisors. On top of medical coverage, long-term care is another potential expense that currently “costs upwards of $400 a day (in today’s dollars) in New York.”
What If I Don’t Have Enough Retirement Savings?
The sad fact is that most Americans approaching retirement age haven’t saved enough. The good news is that there are steps you can take to fatten your savings account if you’ve discovered you’re not on track to retire when you’d prefer. These steps are:
- Continue to work. The longer you can earn an income, the faster your retirement portfolio will grow. Even part-time work can make a big difference.
- Rent out your assets. Work on generating income through your home, such as by renting out a room through Airbnb, renting out your car through a service like Turo, or even renting out your pool through Swimply. Or consider homesharing using a roommate matching service like Silvernest.
- Start a side hustle. Use your spare time to make money through a business or part-time job. Sell cast-off clothing and home décor online, pick up a side job through Uber or Instacart, offer to tutor to high school students, or catering services. Use your skills to generate more cash.
- Take out a reverse mortgage. If you don’t have the time or ability to work any harder than you currently are, another option may be to take out a reverse mortgage or home equity line of credit as an additional income stream.
Either by increasing your income or reducing your expenses, you can make solid headway toward that retirement you’ve dreamed of.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.