The average age of retirement in the United States is 63, and the life expectancy is just under 79 years. This means that the amount of money you need to retire is the amount you need to live on for 16 years.
The median weekly earnings for full-time workers in early 2018 was $811, or just over $42,000 a year. If you want to live as comfortably as the average person in your retirement then you would need $675,000, assuming the aforementioned average wage and the average time spent in retirement.
But it’s not quite that simple. The average quoted amount for a comfortable retirement is $1 million, a significant amount more than the figure above. But many retirees are complaining that even this is not enough and some experts are suggesting that you will need to save a lot more if you live in some of the more expensive US states.
So what is the truth and how much do you need to retire?
Can You Reach $1 Million?
It’s fair to assume that $1 million is beyond the scope of what the average person could hope to achieve. Around 10,000 people reach retirement age every day in the United States and many of these will simply not have anything close to a seven figure sum waiting for them.
So before we find out if this is enough, let’s discuss if it is even attainable.
Many Americans live hand-to-mouth before the age of thirty. This is when they are settling into their careers, when they are getting on the housing ladder, buying cars, and starting families. There are student debts to pay and they may be on a basic pay.
So let’s suppose that you don’t start saving for your retirement until you are 35 and that you have no money or assets coming your way from parents or long-lost rich relatives.
Most of you will be able to set aside 10% of your income without making any major cutbacks. If 5% of this goes towards a savings account, which in turn can be used to fund a child’s college education, a holiday, or even a new car, then that leaves 5% for your retirement.
5% of $42,000 is $2,100. If you save from the age of 35 until the age of 65 that’s just $63,000. In other words, it’s nowhere near. If you double that to 10%, you earn $60,000 and you allow for interest, that’s still just $190,000 to $210,000, depending on the rate of interest.
To save $1 million with that salary you would need to put aside 80% and then hope that interest takes you the rest of the way. If you were to save that amount over 30 years putting aside just 10%, your salary would need to be over $335,000.
How is That Possible?
If you look at the figures as simplistically as we did, then it seems impossible. But there are a few things we didn’t factor in. Firstly, there will be additional windfalls that can help to boost your earnings. There will be promotions, bonuses, house sales and more.
On top of that you will also have retirement funds to collect and you should be able to earn interest on these funds and on any savings that you have. Based on this, the actual amount of money that you would need to earn in order to save $1 million may be closer to $100,000, but that’s only if you are a committed saver and you invest early on.
Is $1 Million Enough?
It depends on where you live and how comfortably you want to live. The cost of living differs greatly from state to state, and the amount you spend on food, bills, rent, vacations and entertainment will change significantly. It could mean the difference between hundreds of thousands of dollars over the course of several decades, which in turn could mean that a retirement fund lasts for several years less in one state than it does in another.
As an example, $1 million will be enough for you to live comfortably for just under 12 years in the state of Hawaii, which has one of the highest costs of living in the US and is also somewhat of a hotspot for retirees.
In Mississippi, however, it could see you through nearly 27 years! In fact, nothing comes close to Hawaii in terms of how little that $1 million can stretch. It will be enough for you to live comfortably for a further 5 years in California and New York, and about 10 years in Washington.
However, it’s important to note that those costs include housing costs, which actually account for a significant percentage of the total amount. If you own your own house by that point, whether because you have bought it outright or paid off the mortgage, these costs won’t come into the equation.
And once you take housing costs out, then Hawaii, and every other state for that matter, begins to look decidedly cheaper.
How Much is Enough for Retirement?
To find out how much you need for your retirement you can use something known as the 4% rule. Basically, this rule states that you can safely withdraw 4% a year from your retirement portfolio, which in turn means that the portfolio needs to be big enough for you to live off that 4% over the course of a year.
If you decide that you need $50,000 a year and you estimate that you will live for 30 years, then you will need $1.5 million ($50,000 x 30). But by the time you reach retirement age you may no longer have mortgage payments and debts to worry about, which could mean you will need just $25,000 a year, or $750,000 in total.
It’s up to you to do those sums in order to determine how much you need and whether what you have will be enough. And it is important to do these sums sooner rather than later.
We tend to be blinded by big numbers, so it’s easy to look at the few hundred thousand we have sitting in retirement portfolios and assume that we have more than enough to live comfortably. But as discussed above, that money goes very quickly and once it is gone you may no longer be in a position to get more.
You owe it to your future self to do the sums now and find out if you will have enough. If not, then start saving more and investing more.