How Much Money Will You Need in Retirement?

According to research published earlier this year by Northwestern Mutual, we Americans are not very good at saving for retirement. In fact, the research found the following startling facts about Americans’ retirement savings:

• One in five Americans have no retirement savings;
• One in three Baby Boomers have less than $25,000 saved; and
• 78% of us are “somewhat” or “extremely” concerned about affording retirement.

Such figures likely spell trouble down the road as more and more Americans, particularly Baby Boomers, reach retirement age. But rather than become dismayed at those statistics, each of us should take findings like Northwestern Mutual’s as an opportunity to ask ourselves an important question: Just how much should we save to live comfortably in retirement?

Naturally, the answer varies from place to place and person to person. But there are some general points that can be made about all our retirement needs and how we can try to meet them.

Retirement Needs Vary from State to State

How much money you should have saved for retirement depends on where you plan to live after you retire. Living expenses in some places—like California or New York—are much higher than in other parts of the country.

To illustrate how widely retirement needs vary, consider a recent report from GOBankingRates that estimates just how long $1 million in retirement savings would last in each state.

To do this, the report first determined the average total expenditures for Americans who are 65 or older. Those expenditures included the annual cost of groceries, housing (including utilities), transportation, and health care. Then, it applied a cost of living index to adjust for differences between each state.

According to GOBankingRates’ analysis, the five states where $1 million would last the longest for a retiree are:

1. Mississippi: 25 years, 11 months, 30 days.
2. Oklahoma: 24 years, 8 months, 24 days.
3. Michigan: 24 years, 7 months, 14 days.
4. Arkansas: 24 years, 7 months, 4 days.
5. Alabama: 24 years, 7 months, 4 days.

In contrast, here are the five states where $1 million in retirement savings would last the shortest amount of time:

1. Hawaii: 11 years, 8 months, 20 days.
2. California: 15 years, 5 months, 27 days.
3. New York: 16 years, 3 months, 22 days.
4. Alaska: 16 years, 8 months, 6 days.
5. Maryland: 16 years, 8 months, 29 days.

That’s bad news for those of us who live in California and want to stay here in retirement, but it mostly tells us something we already knew: Living in California is more expensive than living in most other states. Given that that’s the case, let’s return to the more specific question in this article’s title: How much do you need to save for retirement?

Estimating Your Retirement Savings Needs

Different financial planners and organizations suggest different rules of thumb for calculating how much you should save for retirement. For example:

• Fidelity, a financial services firm, recommends that Americans save at least one year of salary by the time they’re 30, 3x their salary by 40, 6x by 50, 8x by 60, and 10x by 67.
• Other advisers suggest estimating retirement needs using an income-replacement rate of between 70 and 80%. That means that your retirement savings should be enough to generate 70 to 80% of your annual pre-retirement income each year.
• Another rule of thumb is the “4% rule,” which says you should be able to meet all your retirement expenses by withdrawing 4% of your total retirement funds.

Of course, these are all just rules of thumb. They may help you come up with a rough idea of how much you should be saving, but they don’t account for your particular circumstances. Depending on when you plan to retire, where, and what you plan to do during retirement, you may need more or less than these rules call for.

Ultimately, the best approach to calculating how much you should save for retirement is to consult a financial adviser. A financial adviser can help you develop a personalized retirement plan whether you’re just joining the workforce in your 20s or approaching retirement age.

Catching Up with Retirement Savings

Unfortunately, whatever amount you think you’ll need for retirement, you may find that, like many other Americans, you haven’t kept up with your retirement savings. According to a 2016 study reported by the Washington Post, nearly three-fourths of Americans lack adequate savings for their retirement.

Fortunately, there are strategies for catching up on your retirement savings, regardless of how close you are to retiring. These strategies include:

• Catch-up contributions. Tax-favored retirement accounts, like 401(k)s and IRAs, have annual contribution limits. For workers under 50 years old, those limits are $18,500 and $5,500 for 2018, respectively. But if you are 50 or older, you can contribute up to $24,500 to a 401(k) or $6,500 to an IRA.
• Paying down high-interest debt. For those of us with debt, there’s always a tradeoff between paying down debt and saving for retirement. But by paying down high-interest debt before retirement, you can free up more funds during retirement for your actual needs.
• Delaying retirement. Delaying retirement can help you save more than you could by your originally planned retirement date. Similarly, you may qualify for delayed retirement credits from the Social Security Administration if you delay claiming Social Security benefits beyond your full retirement age.

Other options could include working a second job before retirement so that you have more income with which to save. Or, after retirement, you could take on part-time work or join the “gig economy” to supplement what you take out from your retirement savings.

Saving Enough for Retirement Requires Planning

Whatever strategy you choose to follow, the key is creating a plan to reach your retirement goals. You can do that yourself after researching your options and considering what your future needs will be, or you can work with a financial adviser with experience helping others plan for retirement.

Whether you’re young or old, it’s never too late to begin planning for your eventual retirement. Even if your savings so far fall short of what you believe you should have already saved, that’s no reason not to plan and begin putting that plan into action today.

And if you’re concerned that you have too much debt to deal with before you can begin saving for retirement, contact Borowitz & Clark for a free consultation to determine how the bankruptcy process might be able to help get those debts under control and set you on a better financial path.