It may be impossible to know exactly how much money you need to save for retirement, but it's a safe bet that if you have little or no retirement savings at all, you are going to have difficulties in your post-working years. Too many Americans currently fit this profile.
According to the Economic Policy Institute (EPI), nearly half of all families have no retirement account savings at all, and many others are underfunded. A recent EPI report found a mean (average) retirement savings of $95,776 across all families.
Given the large number of Americans without any savings and the skewing effect of wealthy families, it is worth looking at the median average (where the number of families above that value equals the number of families below that value). For all families, median retirement savings was a paltry $5,000. For families with any retirement savings at all, the median was $60,000. The collective situation is worse than the mean average indicates.
Even those close to retirement age are underfunded. EPI found that the mean retirement savings of families from ages 56 to 61 was $163,577. According to the Fidelity Savings Factor, a rough measure of the percentage of income you should have saved for retirement at given ages, you should have saved roughly between 6 and 7 times your current income by this time. That translates to a salary in the $23,000 to $27,000 range. According to the Current Population Survey from the Census Bureau, the average working-age American is earning almost twice that amount, between $46,000 and $47,000.
Without sufficient retirement savings, retirees will be forced to depend on Social Security – a system that was designed to supplement retirement income, not replace it. On the average, Social Security was intended to provide approximately 40% of retiree income, and that does not necessarily reflect the average retiree's expenses.
In essence, too many Americans appear to be hoping for some external factor to help them meet retirement needs – or simply putting off the subject because it is too unpleasant to think about – instead of taking action to correct their lack of retirement readiness.
Use the EPI and Fidelity reports as a wake-up call to assess your retirement situation today. Think in more detail about your retirement plans and what percentage of your income is likely to be required to sustain you in retirement. 70-80% of pre-retirement income is a good rule of thumb, but that assumes a fairly simple retirement. Your plans may differ.
Once you have an idea of how much money you will need, you can assess whether or not you are on track to meet your goals. If not, the solution is simple. You need more income and less spending.
Review expenses with greater scrutiny. Is there a regular expense that you can live without or scale back? Look for alternate revenue sources, anything from side consulting gigs to assets that you don't use and can readily sell.
Next, create (or adjust) a budget accordingly and stick to it so you can start accumulating savings and direct some of the surplus toward retirement funding. In the words of April Lewis-Parks, Director of Education and Public Relations for Consolidated Credit, "Put away some money. Even if it's just $10 a week, that's something...Have it become a habit and keep doing it week after week, month after month, year after year."
To meet your needs, that $10 may need to be $100 or more – but the principle is the same. Make that regular contribution to retirement funds a fixed part of your budget. If possible, take full advantage of 401(k) programs that automatically deposit a portion of your paycheck into retirement funds, especially if there is a matching program.
Don't trust 401(k)s? Open your own IRA or other financial vehicle if you have the time and acumen to manage it yourself (but don't overestimate your investing skills).
Re-evaluate your retirement plans periodically to make sure your investments are on track and that your retirement spending and income assumptions are still reasonable. It is not uncommon to spend more in retirement, especially when health care costs are concerned. A Fidelity study suggests that the average couple currently retiring at age 65 will spend $260,000 in uncovered medical costs – and that does not count long-term care. Is your family properly prepared?
People with better credit can save more for retirement because they pay less in interest. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Action today will pay off tomorrow in a more comfortable and secure retirement for you and your loved ones.