On this edition of Industry Focus, host Michael Douglass and Fool contributor Matt Frankel discuss personal finance -- in particular, planning for retirement. After you retire, your savings and Social Security benefits will probably be your only sources of income. Social Security is unlikely to be enough all by itself, and the average American doesn't have nearly enough to generate enough sustainable income.
In this video, Michael and Matt discuss the scary state of retirement savings, and what you can do if you've fallen behind.
A full transcript follows the video.
This video was recorded on Oct. 30, 2017.
Michael Douglass: Seems like a good time for us to talk about retirement savings.
Matt Frankel: Yes, definitely. For retirement, the statistic that stands out to me the most is the average retirement savings of Americans, which is $95,776 as of the latest data. In the older group, the pre-retirees, which is 56-61 years old, it's $163,577. Which sounds like a lot at first, but really is not enough. The average social security benefit right now is around $1,400. You might have the actual number in front of you.
Douglass: Yeah, it's right around there.
Frankel: That's about right?
Douglass: Yeah.
Frankel: That's not likely to be enough, when you think about how much money you spend. The average American needs a whole lot more than they have. And this is, when you hear about the retirement crisis in America, what they're referring to.
Douglass: Yeah. To be precise, that's $1,413.08 as of the 12-month period ending June 2017. So, it's really not that much money. When you think about your average expenses on a monthly basis, it's most likely, unless you live in an incredibly low-cost area, you're spending a lot more than $1,400 a month. So, I would encourage everyone listening right now, do a quick exercise. What are your current monthly expenses? Write them down on a piece of paper, or just do a total average guess. Maybe it's $5,000 a month, maybe it's $6,000. Take that, subtract $1,400, because that's more or less the average social security amount. The remainder, multiply it by 25. That's a reasonable guess for how much money you're going to need to have saved for retirement if you're going to maintain your current spending. Maybe you spend less in retirement, maybe you spend more because of healthcare. There's a lot of ways and reasons to argue either for your spending going up or down. But if you just assume the current, that's what that number looks like. It's probably a big number. It's probably pretty daunting. But, fortunately, there are a lot of ways to get there.
Frankel: Yeah. It's actually probably closer to $1 million for the average American than $163,000, which is what people are saving before retirement. Based on the 4% rule for retirement, which is not perfect by any means, but it's a good guideline, based on that rule, $1 million translates into ...
Douglass: $40,000 a year.
Frankel: Yeah. I'm the math guy. [laughs] It translates into about $40,000 a year of sustainable income that won't run out. And that's from $1 million. $163,000 does not translate to nearly what most people consider a living income.
Douglass: Yeah, absolutely. The other thing that I think is worth considering is, there are a lot of ways to save for retirement, and a lot of tax benefits to doing so. When you think about your 401(k), if you're in a traditional 401(k), you get the text back up front. If you're in a Roth 401(k), then that money can grow tax-free and you can take it out tax-free for forever. If you think about IRAs, there are benefits to those as well, both either traditional or Roth. Frankly, when you have a 401(k), usually your employer gives you a little bit of money as a thank you for saving for retirement. It's called the employer match. And that's something that everybody should maximize if they have that opportunity.
Frankel: It's not just for the long-term effect. Like you said, you get a nice tax break now, or later. But for a traditional IRA, for example, if the average person maxes out their traditional IRA, which is $5,500 right now, that's about $1,000 in tax savings for the person in the average tax bracket. And that's on top of the compounding power over the long-term, and ending up with enough money to save for retirement. You actually get a nice little bonus along the way.
Douglass: Yeah, it's a pretty substantial bonus. And it's interesting, because these are bonuses that a lot of people forgo, even when they're saving in other ways. So, really think about the potential tax benefits of a retirement account. If you're interested in learning more about traditional vs. Roth and how does work, I have an article on that. Just shoot me an email, [email protected], I'll be happy to send it to you so that you can understand what the benefits and drawbacks of each are, and then apply those to your personal circumstances and make the decision that makes the most sense for you.
