Do you know how much you need to have saved for retirement so you can support yourself comfortably? If you do, you're likely among the minority.
Unfortunately, a recent study from the Transamerica Center for Retirement Studies has revealed that workers are dramatically underestimating the amount they need to have in their investment portfolios to provide the income they'll need to supplement Social Security. And this could be a big problem for those who reach retirement with too little money to live on.
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Here's how much workers think they need to have saved
According to the Transamerica Center for Retirement Studies, the median amount that current workers estimate they will need for retirement is $350,000.
While that may seem like a lot, the reality is that this will produce only a very small amount of income at a safe withdrawal rate. That's a safe amount you can take out of your account without risking your principal balance falling so much that you can no longer earn reasonable returns and thus are in jeopardy of your funds running dry.
Traditionally, experts recommended following a rule called the 4% rule. This allowed a withdrawal of 4% during your first year of retirement and annual increases based on inflation. If you follow this rule and you have the $350,000 saved that many Americans believe is sufficient, your retirement investment accounts would provide you with just $14,000 in annual income.
Even when combined with the average annual Social Security benefit of $19,932, you would be left living on $33,932. With the Bureau of Labor Statistics reporting a median annual salary of $53,924 in the first quarter of 2022, this would provide around 63% of the median income in a best-case scenario. And most experts recommend replacing about 80% of what you were earning. So you wouldn't have nearly enough.
Odds are, you'd end up with even more of a shortfall than these numbers make it seem. There are a few key reasons for that. First, many now believe a lower rate of withdrawal than 4% is preferred because of longer life spans and lower projected returns on investments going forward. So, you may need to take even less than 4% out of your accounts. Second, if you're a long way away from retirement, inflation would dramatically reduce the buying power of that $33,932 in annual income.
How much will retirees actually need?
You don't want to dramatically underestimate your retirement needs, as many Americans are doing based on the Transamerica Center for Retirement Studies' data.
To be sure that doesn't happen to you, it's smart to set a savings goal based on your personal financial situation. One easy way to do that is to figure out your likely final salary by assuming a 2% raise each year until retirement, then assume you'll require a nest egg equal to 10 times that amount.
By taking the time to determine exactly how much you should be putting away for your future, you can make sure you don't end up with too little money to support yourself after you no longer get a paycheck.
