If you’re worried that you won’t have enough money to retire comfortably, you’re not alone — 70% of Americans share this concern. People know they need to save, but the specifics get hazy from there. How much should you have in your retirement account? How much do you need to save every year? How should you invest your 401(k)?
The answers to these questions are different for everyone, but accepting these five hard-to-believe retirement facts will help you build an informed plan that’s tailored to your specific goals.
1. The average retirement number should be $650,000
Many people wonder how much they’ll need to save to retire. There’s no universal answer, leading to poor education on the topic. When you eventually stop working, cash flow from Social Security, pensions, or investments will cover your living expenses. Pensions are disappearing, so people are relying more heavily on their own investments.
Unfortunately, dipping into your savings is risky — you can permanently exhaust your money by spending too aggressively. That’s why financial planners developed the 4% rule. Historically, retirees could safely withdraw 4% of their retirement savings each year, while their investments produced dividends and interest. Low interest rates have caused many advisors to revise that rule to 3%, posing an even larger challenge to retirement planning.
The median retired couple has annual income of $57,000, $31,000 of which comes from Social Security. Investment income must cover the $26,000 gap. To stay within 4% rule guidelines, that necessitates between $650,000 and $860,000 in retirement savings (and that’s just to maintain a median income, assuming no taxation). That number will also be higher for people retiring in the future, due to inflation.
Surveys show that most Americans think they’ll only need around $300,000 to retire comfortably. Even more troubling: The average American over 65 only has about $200,000 in retirement assets. That’s obviously not good enough. The math just doesn’t add up. You need to save and invest early in your career to ensure that you’ll be covered down the road.
2. The average couple needs $300,000 in assets to cover healthcare costs in retirement
Out-of-pocket medical expenses are different for everyone, but it’s common to incur most of those costs in your older years. Medicare provides partial coverage, but you’re still on the hook for a lot of those bills.
The $300,000 number, of course, an average estimate based on forecast expenses and growth rates. That said, a retired couple can reasonably expect to spend that much to meet all of their lifetime medical needs. We saw that most Americans believe they’ll only need $300,000 to retire comfortably, so it’s unlikely that most people have budgeted enough for doctor visits, prescriptions, and hospital stays.
3. Your savings become less valuable over time
Inflation is a major threat to your retirement plan. The U.S. dollar loses buying power over time, with a 3% average inflation rate. That figure has been closer to 2% for the past 20 years, but there are signs that we are entering a period of higher inflation as the economy recovers from the COVID-19 pandemic.
That’s a problem for people living on a fixed budget. Are you planning to live on $100,000 per year when you hit age 65? That will spend as if it’s $75,000 by the time you’re 75, assuming 3% inflation. The value of your assets can drop fairly quickly, even if your account balance isn’t falling.
Luckily, there are strategies to combat inflation. Retaining some exposure to stocks in your investment portfolio is one popular strategy because equity prices rise with inflation and tend to grow over time. In your fixed income portfolio, you can also consider using Treasury Inflation Protected Securities, whose value and interest payments adjust with inflation.
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