Many Americans struggle to come up with an official retirement savings target. After all, in the absence of a crystal ball, it's hard to know what your senior living expenses will look like down the line, and it's downright impossible to predict how many years of retirement you'll actually end up needing to fund.

Still, those of us who are planning for retirement can do our best to guess at these costs and establish our nest eggs to align with what we think we'll ultimately need. The problem, however, is that most Americans aren't good at this particular guessing game.

In a recent study by Fidelity Investments, 75% of respondents underestimated the amount of money they'll need in retirement. Specifically, 72% weren't aware just how expensive healthcare in retirement can be, while 22% came up with a medical care figure that fell about $200,000 short of what recent projections actually call for.

Retired couple shopping


And it's not just expenses a large number of us are underestimating; we're also selling our life expectancies short. Almost 40% of respondents felt they'd be OK with enough savings to last for just 12 to 17 years, but given that Americans are living longer these days, those who retire on time (meaning, at full retirement age for Social Security purposes) should plan for 20 years of savings at a minimum. Furthermore, since the Social Security Administration reports that one in four 65-year-olds today will live past the age of 90, while one in 10 will live past 95, a significant portion of the senior population will need savings that last a good 25 to 30 years, if not more.

What all of this tells us is that while we can't be expected to come up with definitive retirement savings targets, most of us do need a better understanding of what it will cost to sustain ourselves once we stop working. And the sooner we get educated, the better positioned we'll all be to ramp up our savings game.

How much will you spend in retirement?

The amount of money you'll need in retirement will depend on a number of factors, such as where you live and how you spend your days. It stands to reason that a retiree living in a big city with plans to dine out and visit the theater regularly might spend more than someone who plans to live in a modest town and keep busy tending to his or her home and garden.

That said, there are certain universal costs that all apply to all retirees, regardless of desired lifestyle, and these are the ones we should all be aware of. We just learned that many Americans grossly underestimate their future healthcare costs, so it might shock you to learn that the average 65-year-old couple today will spend around $400,000 on healthcare throughout retirement.

Not only that, but seniors today, on average, spend roughly:

  • $15,500 per year on housing
  • $6,850 per year on transportation
  • $5,500 per year on food
  • $1,400 per year on clothing

You can't help but notice that all of these expenses are completely non-negotiable. After all, no matter your age, you need a roof over your head, food on the table, clothing to wear, and a means of getting around town.

And again, these numbers are just averages. If you live in an expensive area of the country with high property taxes or plan to continue owning a home that's pricy to maintain, your housing costs might be considerably higher than the figure above. The same applies if you're kitchen-averse and do most of your dining outside the home.

None of this data is meant to scare you but rather to make you aware of the costs you're likely to face as a senior and the number of years you might face them for. Once you get a better sense of how much you might actually spend, you can work on boosting your savings rate to ensure that you don't fall short in retirement.

Get aggressive with your savings

While retirement is expensive no matter how you look at it, the good news is that if you still have a number of working years ahead of you, you can take steps to build a nest egg that will sustain you down the line. Currently, workers under 50 can contribute up to $18,000 a year to a 401(k) and $5,500 a year to an IRA. These limits increase to $24,000 and $6,500, respectively, for those 50 and older.

Even if you can't max out these limits, saving a smaller amount each month will go a long way if you're years from retirement and choose lucrative investments, like stocks, that produce decent returns. As an example, if you're 45 with the goal of retiring at 67, and you start socking away $400 a month effective immediately, in 22 years, you'll have about $235,000 in your nest egg, assuming your investments generate an average annual 7% return (which is actually a bit below the market's historical average). Increase that retirement plan contribution to $600 a month, and all other things being equal, you'll wind up with $353,000 in time for retirement.

Though you can't by any means predict the future, you can do your part to read up on the costs of retirement and take steps to save for them accordingly. And the sooner you do, the better your chances of building a nest egg that will provide all of the income you need as a senior.