At Addition Financial, we spend a lot of time helping our members understand the truth about financial myths. Money management is difficult for a lot of people, and we think that’s one reason money myths can be tenacious even when the truth is (relatively) easy to find.
One of the most dangerous myths we’ve heard is the one that says people can put off saving for retirement when they’re young. A recent CNBC article pointed out that 66% of Millennials say they don’t feel “on track” in terms of saving for retirement.
Even more alarming is that 59% of people in their 40s have less than $100,000 saved for retirement and 41% have less than $50,000. Here’s what you need to know about saving for retirement.
It takes more money to retire comfortably than you might think. If it landed in your lap all at once, $100,000 might seem like a nice amount of money. You could probably have a lot of fun with it!
But, let’s break it down. If you want to retire at 67, you’ll need to consider the amount you have saved, your life expectancy and your annual expenses.
As of 2019, life expectancy in the United States is 81 years and one month for women, and 76 years and two months for men. The overall average is 78 years and eight months – and we’ll use 78 years for this example.
If you retired at 67 and lived to be 78 years old, you would need 11 years’ worth of living expenses saved. While we’d all like to believe that our Social Security will be there when we need it, the reality is that it may not be.
If you had saved $100,000, that would mean you’d have only $9,091 per year to pay your living expenses. Even the most frugal person would have difficulty living on that amount!
In fact, saving three times as much would only give you a little over $27,000 to live on, which is only a little higher than the current minimum wage.
A good rule of thumb is that you will need 80% of your pre-retirement salary to live comfortably. That means if you were earning $100,000 at retirement, you would need $80,000 per year. Using our above example, if you retired at 67 and died at age 78, you would need $880,000 to pay your post-retirement expenses.
Let’s get back to that money myth. Do you need to worry about saving for retirement while you’re young?
The short answer is yes, you do. The sooner you start saving and planning for retirement, the more likely it is that you will have enough to be comfortable when you do retire. Even if you’re still in your 20s, you should:
It’s never too early to start saving. There’s no way to predict what the future will hold, but it’s safe to say that the cost of living will increase between now and the time you retire. We suggest putting a line item in your monthly budget to fund your investments.
If you have questions about saving and investing for retirement, Addition Financial has the answers you need. You can check out our retirement calculators here or read about our retirement and investment accounts here. We’re here to help you have a happy and financially secure retirement!