Wage earners pay 6.2% of their salary in social security taxes. Employers kick in that same amount. The bad news is that the benefits that accrue from a lifetime of paying into Social Security won’t be enough to support anyone’s retirement lifestyle.
Of course, Social Security was never intended to be the only source of our retirement income. It will only cover about 40% of anyone’s retirement expenses. The remaining 60% must come from private pensions and retirement savings.
The actual dollar amount that the individual retiree must cover is a matter of lifestyle and personal preferences. What is not variable, is that a retirement savings and income plan needs time to mature and accrue the income a retiree needs.
So, the key is starting early and including retirement plans into an overall savings strategy. Experts have provided some rules of thumb on how much someone needs to save. That advice is as variable as individual savings/income needs–e.g., about $1 million, or 80 to 90% of annual pre-retirement.
Because of all the variables, retirement gurus have come to no agreement on the total dollar amount. Again, that amount has to be based on known expenses, probable health issues, and whether the retirement living will be downsized or maintained at the current level—or possibly be more expensive because of travel and increased leisure time.
So, the question is, how much is enough? Say you plan to retire at age 65. Guess how much you must have saved to accrue an annual income from savings in the amount of $60,000 a year.
Based on a sustained spending/withdrawal rate of 4%, you must have $1,500,000 in retirement savings.
You can do your own calculations and factor in social security to augment your nest egg. How far that income goes and whether it will be enough is a matter on what you expect to spend during your retirement.
Based on one survey by the Employee Benefit Research Institute, older Americans spend an average of 45% of their income on Housing and another 13% on food. Health expenses amount to about 10% with transportation and other miscellaneous expenses taking up the rest.
The bottom line is that the nest egg you need for retirement won’t grow overnight. The data shows that most of today’s retirees did not start saving independently for retirement until at about age 40. Had they begun earlier, say saving $300 a month starting at age 30, assuming a 7% return, they could have amassed about twice the amount.
In these uncertain times when COVID-19 has stifled the economy, the bad news is one Bankrate survey that 20% of American workers are not saving for retirement and 22% have retirement savings accounts amounting to less than $5,000. That disruption has caused many to stop setting financial goals and planning for retirement.
Getting back on track means getting back to basics. Budget planning is a three-step process of 1) deciding what expenses are necessities, 2) what spending is discretionary, and 3) what money can be reallocated from necessities and discretionary spending to save for emergencies and eventual retirement.
Retirement planning is taking the long view in step 3 of budget planning and putting retirement savings into automatic as early as possible.
