Sheila D. from Cheyenne, WY: Hi Mitch, I’ve seen a lot of articles and statistics saying that a majority of Americans aren’t ready for retirement. The main finding seems to be that people are far from having enough saved.1 My question is, are these statistics really true, and how can a person really know whether they have enough saved or not?
Mitch’s Response:
Thanks for writing, Sheila. You bring up an interesting point about retirement statistics, which I agree are largely skewed to the negative. Depending on the source of the research and the size of the group polled, these statistics can vary pretty greatly. My advice would be not to get too into the weeds on the numbers and instead focus on what it means to be retirement ready.
According to the Bureau of Labor Statistics, adults 65 and older spend about $46,000 per year on average. The first question I’d ask you is: what is that number for you?
Zacks Investment Management can help you calculate it, if you’re unsure. Some of the factors we’ll remind you to consider are the cost of healthcare in retirement, inflation (which is different across spending categories), and legacy/estate planning if that’s something you’re considering. It would be up to you to fill in the other gaps, i.e., thinking about how much you spend on a monthly basis (bills, mortgage, food, travel, entertainment) and how that may change over the course of retirement.
Once you have a rough idea of that monthly income number, you can take a look at your expected Social Security payments and other income sources, and then figure out how much ‘passive’ income you need to generate from your savings on an annual basis. Once you figure out an approximate value for your monthly and annual income need, then you can calculate how much you need in retirement savings to meet your need. Of course, none of these numbers will be exact, but running some conservative numbers can help you buffer against margin of error.
The next question becomes: do you have that much saved yet? What steps do you need to take to get to your number? The plan limits are fairly high and can allow for catching up. Americans can contribute a maximum of $18,500 to a 401(k), 403(b), most 457 plans and the Thrift Savings Plan in 2018, and people over the age of 50 can make an additional $6,000 in “catch-up contributions” per year to their 401(k). For traditional and Roth IRAs, the contribution limits are $5,500 a year with ‘catch-up’ contributions of $1,000 for those 50 and over. So, you have options.
The key is taking the time needed to figure out how much income you need in retirement, and then enlisting the help of someone like Zacks Investment Management to help you convert that number into a figure for how much you need saved. Once we know that number, we can help you outline the steps that we believe are needed to accumulate those assets, which includes not only a savings strategy – but also a growth strategy.
If you are looking for additional insights into how to effectively prepare for retirement, download our Retirement Guide today.2
Disclosure