How much do you need to save for retirement?

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Here is one of the most common questions individuals have, “How much do you need to save for retirement?”

On average, American workers think they’ll need $1.7 million saved for retirement. (1)

However, the median total household retirement savings across all workers is approximately $93,000. (2)

There is a massive gap between ideal retirement savings and the reality of retirement savings. I think it’s because America is facing a retirement crisis. Inflation is the main obstacle to saving for a comfortable retirement in 2023.

Most financial experts agree that a significant portion of the population will lack the resources to live comfortably after they stop working.

Things are not the same as three years ago. It also keeps changing. We need to be flexible and adaptable to survive.

In this post, you’ll learn how to plan for retirement savings.

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Life Expectancy

Life expectancy is one of the critical factors for retirement savings. The average life expectancy was 65 in the late 19th century, but it all changed in the 20th century. These days, people live until 80 years old.

The U.S. government recognized it and established Social Security in 1935. The program initially started paying benefits at age 65, which became the official retirement threshold. Yet it was never intended to provide more than a bare minimum income.

In addition, our monthly expenses went up with inflation, and the costs of education and medical fees grew like snowballs. Maintaining a decent standard of living is pricy nowadays.

In 2020, the average monthly Social Security benefit for retired workers was $1,544. Among non-retirees, 73 percent are worried they won’t receive any Social Security benefits by the time they retire. (3)

On the other hand, average healthcare spending in 2020 was $6,668 yearly for retirees and $4,762 yearly for workers. (4)

Well… when you get older, you’ll need to spend more money on maintaining your body. Medical expenses can’t be avoided. Living only on Social Security is nearly impossible.

So, what can we do?

Boost Savings

According to Statista, (5) 82% of all workers are learning on self-funded savings, while 1 in 3 baby boomers rely on Social Security as their primary source of income.

While Social Security is part of the retirement plan, we can create different sources of income for your retirement.

Here are some examples:

Having multiple sources of income after retirement will help you enjoy a more stable retirement.

I have a solo 401(k), Roth IRA, and a taxable investing account with Fidelity. I invest in dividend stocks and ETFs monthly.

I started with little money, but the power of compound interest is real money. I saved $100,000 in 3 years and earned $200 in monthly dividends. I know it is still not a lot of money, but this is passive income. My ideal retirement life is to live with dividends income. So, I’ll keep investing and boosting retirement savings.

If you are not ready to invest in stocks, starting with a high-yield savings account is also a good idea to boost your savings. With interest rates rising, it is not a good time to borrow money from the bank, but it is a good time to lend money to the bank.

Here are free printables to support your savings goal. Whether your savings goal is short-term or long-term, it’s helpful to visualize it!

Budgeting

As important as increasing your assets, there is another essential thing to do.

In 2020, the average annual spending by Americans ages 65 and older was $47,579, or $3962 monthly. (6)

There are various formulas to estimate retirement expenses, but a well-known rule is the 80% rule. This rule suggests that annual post-retirement income should be 80% of pre-retirement income.

If your living expenses are $47,000 annually, your living expenses should be $37,600 yearly after you retire.

This percentage is based on the fact that some expenses drop after you retire, like commuting and retirement-plan contributions. But so many retirees report that their expenses went up after retiring. (more time to go out, healthcare fees increased, a chance to travel, etc)

Here are some ideas for creating a budget for retirement:

  1. List your expected spending in retirement (consider major lifestyle changes)
  2. Consider expenses that will change in retirement.
  3. Estimate your retirement income.
  4. Set up a spending plan you can track and adjust.
  5. Try out your budget while you have a job.

After you’ve set up a retirement budget, it can be a good idea to test-drive your plans while you are still working. If you spend more than anticipated, you can boost your savings or go back to the budget and see where adjustments can be made! You may find you overlooked certain expenses.

Lifestyle

Last but not least, what are your lifestyle preferences in retirement? You now have a baseline spending plan. Let’s talk about the retirement lifestyle.

While your retirement lifestyle may be limited by how much you have saved for retirement, there are many ways to enjoy a high-quality life on a limited retirement budget:

  • Live by the beach (swim and watch the sunset by the water every day)
  • Back to school (certain age can often take college classes for free or at significantly discounted prices)
  • Volunteer activity
  • Gardening
  • Crafting
  • Focus on your health
  • Affordable traveling (off-season traveling)

Wrapping Up

Whatever you save and invest today for the long term can make a big difference in the future! Save money, diversify savings, make an expense plan, and learn budget-friendly activities to prepare for retirement.

References:

  1. Peterson, Mike. 2022 401(k) Participant Study – Gen Z/Millennial Focus. https://content.schwab.com/web/retail/public/about-schwab/schwab_2022_401k_participant_survey_genz_millennials_deck.pdf.
  2. Transamerica Center for Retirement Studies. (2021, October). Life in the COVID-19 Pandemic: Women’s Health, Finances, and Retirement Outlook. Transamerica Institute. Retrieved from https://transamericainstitute.org/docs/default-source/research/women-retirement-security-report.pdf
  3. Social Security Administration. (2021). Fast Facts & Figures about Social Security, 2021. Retrieved from https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2021/fast_facts21.html
  4. U.S. Bureau of Labor Statistics. (2020). Consumer Expenditures Survey 2020. Retrieved from https://www.bls.gov/cex/tables/calendar-year/mean-item-share-average-standard-error/reference-person-age-ranges-2020.pdf
  5. Rudden, J. (2020, January 6). Number of retired workers receiving Social Security in the United States from 2009 to 2019. Statista. Retrieved from https://www.statista.com/statistics/194295/number-of-us-retired-workers-who-receive-social-security
  6. U.S. Bureau of Labor Statistics. (2019). Consumer Expenditure Survey. Retrieved from https://www.bls.gov/opub/reports/consumer-expenditures/2019/pdf/home.pdf

Published by Happier Freelancing

I'm a freelance graphic designer + web developer. I fully paid the mortgage in 8 years, graduated college without a student loan, and became debt-free in my mid-30s. Money Mottos to Live By: "Spend less than you earn. Buy less, choose well. Live frugally, and save regularly."