How Much Do You Really Need to Save for Retirement?


Written by: Jon McGraw

Retirement is one of the seasons of life that people look forward to, and being work-free never sounded better than when you’re nearing retirement. But behind this eager anticipation may be the nagging feeling that you have not saved enough. With retirement almost within reach, it’s important that you’re confident that not only will your needs be met but your wants as well. You want to feel secure that you’ll be able to live comfortably during retirement.

We have been asked many times if there is a ballpark figure that people should aim for before they retire. General rules of thumb for retirement range from saving $1 million to 80% of your annual income. But how you determine the amount you’ll need is far more important than those ballpark figures. Here’s why: Deciding on an estimate without determining your future expenses is practically useless, as the numbers will most likely not match.

The Real Cost of Retirement

Well-off investors estimate that they need $2.5 million to maintain their lifestyle during retirement. Meanwhile, one in 10 workers thinks that they need at least $1.5 million to have a comfortable retirement. Although these figures may be helpful as a starting point, your retirement savings should be tailored to your lifestyle, health care needs and other long-term expenses. Financial experts will tell you to save as much as you can, but it all boils down to where you will spend your savings. Let’s break it down further:

  • Calculate your expenses. According to the Social Security Administration, the average 65-year-old today will live to be 85–87 years old. This means you need to compute your expenses for at least the next 20 years after your retirement.
  • Determine the sources of your retirement fund. Basically, your retirement fund can come from three main sources: pensions, Social Security benefits, and savings or investments. Social Security alone is probably not enough to sustain your retirement, so contributions to a retirement plan are practically essential. If your employer offers a company-sponsored plan such as a 401(k), consider signing up for it, especially if your boss matches your contributions. According to a study by Schwartz Center for Economic Policy Analysis, Americans are not saving enough for retirement. In fact, 68% of working-age individuals (ages 25–64) did not participate in these employer-sponsored plans. Don’t miss out on this opportunity. The more you contribute to your 401(k), the higher the amount your employer can match.
  • Determine your readiness. It’s good to have an accurate assessment of where you stand in your retirement savings. According to the 16th annual Transamerica Retirement Survey, retirement confidence—workers who were “somewhat” or “very confident” that they could retire comfortably—decreased from 64% in 2014 to 59% in 2015. Find out your retirement readiness based on your age. It’s vital to know if you’re on track with your savings to help you manage your finances better.
  • Work with a financial advisor. Planning for retirement comes in stages, and a financial advisor can guide you in your savings and investments through those stages. In the survey above by Transamerica Center for Retirement Studies, 41% of retirees regretted not relying more on financial advisors in managing and monitoring their savings. Working with a professional can help you optimize your Social Security benefits, determine the primary tax vehicles you can withdraw money from, and compute health care long-term-care expenses.
  • Avoid comparing. Your retirement needs are different from your colleague’s. It’s not a competition to see who can save more. Morningstar Investment Management Group Head of Research David Blanchett sums it up perfectly: “The true cost of retirement is highly personalized based on each household’s unique facts and circumstances.” Your retirement future is unique, and the need to approach it with diligence, caution and knowledge is crucial.

There is no single answer that solves the perennial “How much should I save for retirement?” question. Instead, you should consider multiple approaches, decisions and options to come up with the most optimal retirement plan for you. But here’s what we know for sure: Living a comfortable life in retirement takes time to prepare for. Success never happens overnight—even in retirement. If you would like to talk with us about planning for your retirement, call Vince Pastorino at (816) 285-9000.

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