How much do you save for retirement? Experts recommend dropping at least 10% of your salary, but a recent report from the Plan Sponsor Council of America (PSCA) indicates that many Americans do not have the measure.
The PSCA, which helps employers manage their retirement plans, concludes that the average American worker contributes only 7.6% of income to a retirement retirement plan. And you have to wonder: Is it enough to ensure a comfortable retirement?
As you will see below, a deeper dive into the numbers indicates that it is possible to finance a decent retirement by contributing less than 10% of your salary, although there are some major reservations. First, you need to start saving in your twenties. You must also earn more than 5% on contributions that match employers.
And even then, you will have no financial space to deal with unexpected circumstances. This is difficult because there are many factors that can derail your savings efforts and your financial security, such as health issues, financial markets and economic cycles and unexpected changes in your work.
Image Source: Getty Images.
Saving at a higher contribution rate increases flexibility to help you overcome those uncertainties. But if times are tight and you can only afford a contribution of about 8%, here’s what your retirement might look like.
Projected income from retirement savings
Suppose you earn $ 54,236 per year, which is the median salary for an employee aged 25 to 54. The PSCA report sets the average contribution of employers at 5.3%. This, together with your contribution of 7.6%, amounts to almost $ 7,000 annually in your 401 (k). Invest most of the contributions in stocks to earn an average of 7% per annum, and your balance on your retirement account will grow to about $ 665,000 over 30 years.
The $ 665,000 retirement savings should generate an income of $ 23,000 to $ 27,000 per year. This is based on the idea that it is safe to withdraw 3.5 to 4% of your savings balance each year with your retirement. At the spread rate, your money should last as long as you do – even through bear markets and difficult economic cycles.
Income for social security
You should also have social security benefits that supplement your income from savings. In its current form, the program replaces about 40% of the average worker’s income. This guideline only applies if you wait until you reach your full retirement age (FRA) to claim your benefits. Claim earlier than that and your benefits will be lower. If you assume you were born after 1959, you are FRA 67.
At an annual salary of $ 54,236, 40% is about $ 21,700.
Total projected income at retirement
Assuming you withdraw $ 25,000 annually from your savings and receive $ 21,700 from Social Security, which generates the total retirement income of $ 46,700. It may not sound like much, but it’s 86% of the work salary we started with. If your cost of living decreases slightly because you have paid off a mortgage or no longer make retirement contributions, you can squeak with 86% of your earned income. But it fits well: so tight that this plan does not allow for fairly general scenarios.
Things that can go wrong
Here are five of the most common scenarios that can ruin your retirement plan.
- You have less than 30 years to save. If your timeline is shorter than 30 years and you have not yet saved, you should contribute more than 7.6% of your income to accumulate enough savings to adequately supplement social security to cover your living expenses.
- Your employer match is lower than 5.3%. A lower employer match requires a higher contribution from you to achieve the target savings balance.
- Due to work or health, you need to retire early. If you retire early for some reason, your social security benefits will be lower. That reduction can be up to 30%. The earlier you claim, the greater the reduction.
- You have an emergency and need to take money out of your retirement account. If you borrow or withdraw from one of your retirement plan funds, you will need to significantly increase your contribution to get back on track with your plan.
- Medical expenses at retirement increase your cost of living. You can see that replacing 86% income is not enough. There can be various reasons, but high medical expenses are a common culprit. You can hedge against this by contributing additional amounts to a health savings account.
Save more than you think you need
For most savers, the average savings rate of 401 (k) of 7.6% is inadequate. The numbers can hardly work on paper, and only for younger workers. But the margin of error is too narrow to provide peace of mind.
If you can, you should target a savings rate of 10% to 15%, excluding your employer contest. If this is not feasible, plan to increase your contribution annually or when you receive an increase. The sooner you start the habit, the easier it will be to ensure your comfortable retirement.