Home/Blog/Investing Insights/Chances Are You’re Not Saving Enough: Retirement Insights By Age

Chances Are You’re Not Saving Enough: Retirement Insights By Age

27 October 2015 in Investing Insights

Retirement is a major lifestyle change. It’s supposed to be a happy and relaxing time. Unfortunately, most people aren’t prepared for it. Based on a study of 20.6 million Americans’ individual retirement accounts (IRAs), the Employee Benefit Research Institute reported this year that 41 percent of households 55-64 have zero retirement savings. Not even $1,000 tucked away. Zero.

As if that wasn’t bad enough, 52 percent of those aged 65-74 are also without any retirement account savings.1 Clearly, the retirement crisis is real.

Americans Are Not Saving Enough

For the few Americans who are saving, most aren’t saving enough. Across all age groups, less than 20 percent of households have saved more than four years of their annual income.2 With life expectancies rising, many people could wind up significantly short if they don’t start saving and making catch up contributions soon.

Retirement_Img_1

Source: Bloomberg

Number Crunching Is Good For You

Before we discuss some retirement savings goals by age, let’s crunch some numbers. The median age in the U.S. is 37.73 with a median income of $53,657.4 Did you know that if you were born in 1960 or later, your full retirement age for Social Security benefits is not 65? It’s two full years later at age 67.

If you elect to receive benefits as early as age 62, they would be reduced to 70 percent. Those able to wait until age 63 would collect 75 percent of their benefits, which increases to 80 percent at age 64. The traditional retirement year at age 65 would yield 86.7 percent and so forth until reaching 100 percent at age 67.5

Is It Too Late To Save Average Joe’s Retirement?

Let’s say average Joe is the median age in America, 38, making the median income of $53,657. He currently has zero retirement savings, guilty of the unrealistic retirement expectations of the middle class.

If he retires at age 65, a rough estimate of his monthly Social Security benefits is $1,638 in today’s dollars.6

His monthly living expenses are currently $2,671 – based on the average cost of single individuals living in 24 major U.S. cities.7 Sticking with today’s dollars for simplicity, let’s say he plans to survive on 85% of his current expenses in retirement until he passes away at 79.

Average Joe
Current age: 38
Retirement age: 65
Life expectancy: 79
Years left to save: 27
Estimated monthly retirement expenses: $2,270
Estimated total retirement living expenses: $381,419
Estimated total Social Security benefits: $275,184
Shortfall: $106,235

Keep in mind these are very conservative estimates assuming Joe has zero dependents and doesn’t run into any costly emergencies or health troubles. In a best-case scenario, if Joe is able to save $2,160 a year and earn a 4 percent annual return over the next 27 years, he just might have enough to scrape by.

If anything unexpected were to come up, he wouldn’t be able to afford it. But if he can save at least $3,000 a year, he could accumulate a $25,000 safety net. Even at that pace, however, his retirement is unlikely to be luxurious or relaxing.

Since it’s impossible to know what the state of the Social Security Administration will be in the future, it’s not a bad idea to assume you won’t get anything and step up your savings goals. That way, whatever you are able to collect in Social Security should feel like icing on the cake, even if it’s a fraction of what you were supposed to get.

Retirement Savings Goals By Age

Don’t put your future at risk like Joe by waiting until your mid 30s or later to start saving for retirement. Take a short quiz now to discover your investing DNA while it’s at the front of your mind. There are many benefits to start saving for retirement while you’re still young.

It’s up to you to figure out how much money you want to have in retirement. There’s no one-size-fits-all plan or magic number. A lot of personal factors can greatly impact your goals: your actual retirement age, income, healthcare costs, location, cost of living expenses, number of dependents, desire or need to travel, and life expectancy.

Here are some tips to consider for each decade of your life until retirement.

20s. Focus on finding a job with a strong career trajectory. Be careful that your early years of independent living are not spent racking up credit card debt. Open a retirement account as early as possible and start paying down your student loans. If your employer offers a 401(k) plan, take advantage of company matching. Minimize living expenses by having a roommate and utilizing public transit. Even small contributions to a retirement account now can make a big difference by your 60s. Sacrificing some lattes and new clothes won’t hurt you. Aim to accumulate 1-2 years worth of retirement living expenses.

30s. If you made smart career decisions in your 20s, your 30s should bring more income. But be careful of lifestyle inflation. Don’t forget to pay yourself first and max out your 401(k) every year. Distinguish wants from needs. You might desire more living space to start a family, but can you afford it? Are public schools really that bad? The $700 a month you could be spending on private school per child could put a big dent on your retirement savings potential.8 Don’t lose sight of the long term. Aim to accumulate a total of 3-4 years worth of retirement living expenses.

40s. You should have a better idea of when you plan to retire. Saving for retirement should be automatic. Reassess your living expenses and compare how much they have changed since your 30s. Update your projections and look for more ways to save. Don’t let a mid-life crisis crush your finances. Nobody needs a shiny, new sports car. Aim to accumulate an additional 4-6 years worth of retirement living expenses, totaling 7-10 years.

50s. Congrats, you’re officially over the hill. Now is the time to really watch how much you’re spending each month. Don’t be foolish and assume that you’ll suddenly be able to spend 15-30 percent less each month once you retire. Make your transition into retirement easier by starting to reduce your monthly spending now. Move into more conservative investments. Stay physically active and listen to your doctors. Maintaining a healthy lifestyle is more important than ever. Aim to accumulate an additional 6-7 years worth of retirement living expenses.

If you aim to retire between the ages of 62-67, having a total of 13-17 years of living expenses saved up should cover you into your late 70s and possibly early 80s. You can adjust your savings goal for total years of living expenses based on your anticipated retirement age and life expectancy.
.
Let’s say your goal is to have $5,000 to spend each month for 17 years of retirement, excluding any Social Security benefits. If you just kept your savings as cash, a rough outline of how much money you could save to reach this goal is below.

Retirement_Img_2

On the other hand, if you invested your savings and earned a 4 percent annual return each year, you could end up with over $1 million more!

Retirement_Img_3

Take Control Of Your Future Now

Every investor is unique when it comes to retirement goals, time horizons, risk tolerance and investing interests.

The bottom line is the earlier you start, the better prepared you should be for the future.

Motif Investing offers no fee Traditional IRA, Roth IRA and Rollover IRA retirement accounts. Get started today.

1 Copland, Craig, “Individual Retirement Account Balances, Contributions, And Rollovers, 2013; With Longitudinal Results 2010-2013: The ERBI IRA Database,” Employee Benefit Research Institute, May 2015.
2 Woolley, Suzanne, “The Retirement Savings Gap Between Haves And Have-Nots Is Getting Bigger,” Bloomberg Business, March 12, 2015.
3 Worldometers, “Population Of The United States (2015 And Historical),” Worldometers, 2015.
4 Luby, Tami, “The Typical American Family Earned $53,657 Last Year,” CNN Money, September 16, 2015.
5 Social Security Administration, “Full Retirement Age: If You Were Born In 1960 Or Later,” Social Security Administration, 2015.
6 Social Security Online, “Quick Calculator Benefit Estimates,” Social Security Administration, October 18, 2015.
7 Elkins, Kathleen, Skye Gould, “How Much It Costs For A Single Person To Live In 24 Major U.S. Cities,” Business Insider, August 28, 2015.
8 Davidson, Jacon, “How Sending Your Child To Private School Can Save You $53,000,” August 18, 2014.

  1. Mark
    10 Nov at 3:39 pm

    Love those tables – what a difference earning a 4 percent return can make over the years. I wish I started maxing out my 401k earlier!

    Reply
  2. Nate
    5 Apr at 6:47 am

    The math is great, but it’s incredibly unrealistic. Want to retire into a $150k annual income…? According to the chart, you need to have nearly a quarter million in savings by the time you exit your 20’s. Good luck! As a certified financial planning professional, I can attest that, MAYBE, 1 in 100 clients actually manages to pull this off – and most of those have really high paying jobs, or family money. The “save early” mantra has been around for decades, and it’s a great theory, but it just doesn’t happen in the real world. 20-somethings are often financially irresponsible. Or, if they aren’t, chances are they are paying off student loans, saving for a home, planning a wedding, still in school, job hunting, or looking to start a family. By the time they reach their 30s, most of their income goes to college savings, a mortgage, cars, insurances, and all that other fun stuff that “adults” have to do…. If a married couple making $100k a year is saving even $10k towards retirement, they are doing dang good, in my experience. Study after study has shown that the majority of Americans will do the bulk of their savings AFTER they’ve hit their mid-40s, once they’ve paid down debt, gotten the kids through school, experienced career enhancements, etc…. Again, if you can begin earnestly and seriously saving in your 20’s, that’s absolutely wonderful. But, that is such a small percentage of the population that, in my experience, articles like this do more harm than good. A large percentage of people that will read this article will become discouraged at their inability to save >50% of their income and simply give up, or push the problem to the back of their minds so that they don’t have to face it. A successful savings plan involves analyzing the investors current budget and savable income, starting the saving process with a REALISTIC number, and then strategizing ways to incrementally increase that amount over the years.

    Reply

*