Are You Saving Enough For Retirement?

In short - probably not.

According to a study by Northwestern Mutual, 21% of Americans have zero retirement savings and 33% have less than $5,000 saved for retirement. Also, 33% of Baby Boomers have less than $25,000 saved for retirement. According to the same study, the average amount Americans as a whole have saved is $84,821 and only 25% have more than $200,000 saved for retirement. What’s even crazier is almost 75% of Americans believe Social Security will “not at all likely” or “somewhat likely” be available when they retire. A study by Provision Living states Millennials would like to have $687,000 saved for retirement, but will likely only have $357,000. At least Millennials have time to change investing contributions. Baby Boomers are right at the doorstep of retirement and are in bigger trouble as their ideal retirement would have $574,000 savings but realistically will have $228,000. The dichotomy between fantasy and reality is great for all generations. We know there is a problem, but are not taking the necessary precautions to deal with that problem.

What Is Your Retirement Fantasy And Reality Like?

Everything depends on your unique situation, but let’s assume in this example you want to spend $75,000 on top of any social security benefits and before any taxes are considered. To make things streamlined, we’re going to assume all numbers are in today’s dollars with a 2.5% inflation rate. Using the 25x Rule as a very rough starting point, you would need to save $1,875,000 (25 x $75,000). Quite a bit larger than the numbers provided by Provision Living.

(We can debate about whether the 25x Rule still applies, but that will be for another day. Today’s purpose of the 25x is to illustrate retirement needs in broad strokes.)

For our purposes, you are 35 years old and would like to retire when you are 65. You have 30 years to save. Let’s also assume you are currently making $100,000 salary per year and receive a 3% 401k match from your employer. You are only contributing 3% of your salary to get the full match. So, you’re saving $6,000 towards retirement ((3% + 3%) x $100,000). You’ve been doing this for a while and have $50,000 saved. You consulted with a financial advisor and for your risk tolerance you are estimating an average 6% annual return.

***For reference, for the 40 year period of December 1978 through December 2018, the S&P 500’s average annual return without reinvesting dividends and before inflation was 8.559%.***

How much will you have saved for retirement in this scenario? The answer may come as a shock to you. At the age of 65, you would only have $442,330 saved—that only gives you roughly $17,693 to live off per year. This is well short of your goal of $1,875,000, or the $75,000 a year you hoped to live off of.

How Can You Fix This Projected Retirement Shortfall?

There are many variables you can change, but none of them are going to be a magic bullet. You will likely need to combine options to make it work. Here is what I mean:

  • Delay the age you retire.

    • If you delay the age you retire, you would accumulate $1,875,000 by the time you are 100. Probably not a great option.

  • Increase your tolerance for risk.

    • If you take on more risk, let’s assume your portfolio could average 10% annual return. You’d then have $1,016,091 as a nest egg; however, this could backfire since your portfolio is much riskier leading to potential overreactions to market downturns.

  • Contribute more to 401k.

    • Your 3% employer match is not going to change, but let’s say you bring up your contribution to 6% of your salary. Combined you now are contributing $9,000 each year. At 65, you’ll have $595,040.

  • Reduce retirement lifestyle spending

    • This may be the harshest reality of all. Using the 25x Rule in our example, your retirement spending would be $17,693. Much smaller than $75,000.

What If You Are Willing To Combine Options?

What if you’re willing to combine all 4 variables? What would that look like? In this example we’re going to assume:

  • Delay retirement to age 68. You now have 33 years to contribute.

  • Increase risk tolerance to achieve projected 8% average annual return over 33 years.

  • Contribute 9% of your salary to your 401k. With company match, you now are contributing $12,000 annually to your 401k.

  • You are willing to make your retirement lifestyle spending whatever the results of these changes are.

With this adjusted scenario, you now have a nest egg of $1,311,936. This translates to $52,477 in lifestyle spending for retirement using the 25x Rule.

Where To Go From Here

I hope this post paints a picture of what the reality is for retirement expectations. The good news is, the younger you are the more your changes will impact your retirement savings. If you’re older and nearing retirement, there is still time to fix everything if you’re willing to put in the work. Also, many people are willing to put in the work but the issue is they haven’t had numbers like these presented to them. They are in the dark.

Without being too cheesy, helping people properly plan for retirement and reaching their goals are two of my biggest passions. I help people every day with these types of calculations and would love to take a look at your unique situation if this post piques your interest.

I offer a free 60-minute consultation for all first-time meetings. The only thing I ask of you is to schedule the meeting directly on my website (through the button below) and answer the questions that will come via email once you’ve started the process. These questionnaires help me make the best use of our 60 minutes together.

I look forward to hearing from you!


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About The Author

Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN. Melby Wealth Management serves clients as a fiduciary and never earns a commission of any kind. Shaun has over 10 years of experience as a financial advisor in Nashville.