Are You Saving Enough?
Updated: Jan 23, 2020
“How much should I be saving for retirement?” It’s a common question and one not easily defined. The future for retirement is pretty murky these days. For starters, the impetus for saving for retirement has recently shifted from being the responsibility of employers to that of employees. Gone are the days when employees retired with hefty pensions that provided not only retirement income for the rest of their days but also came with retiree healthcare. These days, saving for retirement rests firmly on the shoulders of employees, many of whom either don’t have access to a 401(k), choose not to participate, aren’t saving enough into one, or aren’t investing what they have saved to accumulate the necessary balance to replace their income when they retire. As a result, we’re currently facing what some have deemed a retirement crisis.
According to a study by the Economic Policy Institute in 2013, the mean retirement account savings for a family nearing retirement was $163,577 while the median savings was $17,000.[i] While the exact amount needed varies from person to person and over time, these balances simply aren’t enough to sustain a family through retirement, particularly as individuals are retiring earlier and living longer. In 2017, the median household income in the U.S. was $60,336 according to data from the Census ACS survey (data for 2018 has yet to be released).[ii] For a family, that number rises to $73,891. According to the Pension Rights Center, the median social security benefit for someone 65 and older was $15,247 in 2017.[iii] Let’s say you are currently 30 years old and want to retire at Full Retirement Age – currently 67. To replace the median income net of social security for 25 years, you need to have roughly $1.7 million saved at retirement (this assumes inflation of 2.5% per year). Assuming an average annual market return of 7%, you would need to save roughly $840 per month.[iv] Using the family median income number, the estimated monthly savings needed rises to $1,091.
Before you start to panic about needing to save a thousand dollars every month, there’s a couple of things that should be considered. The first is that saving for retirement is not an exact science. There are a lot of things at play – public policy, taxes, market returns, and personal preferences to name a few. We have no idea what the market will do over the next thirty years nor do we know what our tax or welfare system will look like. What this doesn’t mean is that you shouldn’t save. For some, the simplest solution is to just never retire, but retirement is not always a choice. Retirement can happen for a variety of reasons including ones entirely out of your control which is why it still pays to be prepared.
Fortunately, it’s not all bad news. While the burden of saving certainly has shifted, companies are still chipping in. If your employer offers any sort of matching, you should contribute at least enough to get the match because that match is free money and shouldn’t be left on the table. Not only that, but matching will help you reach whatever savings goal you choose to target. Let’s say you want to target $500 a month and you make $50,000 a year. That means saving 12% of your gross paycheck on your own. But let’s say your boss matches 6% of whatever you save. If you contribute 6% of your paycheck, your boss will match that 6% and now you only have to stash away $250 a month on your own but you end up saving $500. Conclusion: contribute enough to get the match always.
When it comes to the future of retirement there is a lot at play and a lot at stake and it’s impossible to know exactly what you should be saving. What’s most important is that you are. If you haven’t yet started saving for retirement, do yourself a favor and just start. Set up an automatic contribution of $100 a month. As you adjust your lifestyle, push yourself to raise that contribution. A general rule of thumb we tell our clients to target is 15% of your income. That may sound like a lot, but you don’t have to start there. One great approach is to start with what you can save right now and commit to saving in the future by directing any future raises you receive towards retirement savings. Many retirement plans offer this feature and you can set it up to automatically happen. It may be hard at first, but it will get easier over time and in the long run, you’ll thank yourself.
[i] Morrissey, Monique. “The State of American Retirement: How 401(k)s Have Failed Most American Workers.” Economic Policy Institute. Economic Policy Institute, March 3, 2016. https://www.epi.org/publication/retirement-in-america/.
[ii] “US Household Income.” Department of Numbers. Department of Numbers, 2018. https://www.deptofnumbers.com/income/us/.
[iii] “Income from Social Security.” Income from Social Security | Pension Rights Center. Pension Rights Center, January 6, 2011. http://www.pensionrights.org/publications/statistic/income-social-security.
[iv] This is a hypothetical example that uses several general assumptions, none of which are guaranteed.