There is no magic number for retirement savings because everyone's goals and expenses are unique. That said, averages can still be a useful jumping-off point to let you know if your retirement savings estimate is in the right neighborhood.
Charles Schwab Retirement Plan Services recently conducted a nationwide survey of 401(k) participants and found that Americans, on average, believe they'll need $1.7 million to retire. It may sound high to some, but it's not as unreasonable as you might think.
A look under the microscope
Schwab's estimate was based on what survey respondents thought they would need for retirement, and they're not too far off the mark. The average household headed by an adult 65 or older spends $49,542 per year, according to the Bureau of Labor Statistics. The average length of retirement is currently about 18 years, according to the U.S. Census Bureau. So if we multiply the average expenditures by the average length of retirement and add 3% annually for inflation, we end up with a total of about $1.2 million.
That's not the $1.7 million Schwab's respondents estimated, but we're not finished yet because we must consider rising life expectancy. The Social Security Administration (SSA) estimates that one in three 65-year-olds today will live past 90, and one in seven will live past 95. If we revisit our retirement-living expense calculation using a 25-year retirement -- from 65 to 90 -- we end up with a goal of more than $1.9 million. If you live to 95, we're talking close to $2.5 million.
But you don't have to cover all these costs on your own. Social Security will cover some of your living expenses, but how much depends on your income during your working years and when you begin receiving benefits. Adults turning 65 in 2019 have a full retirement age of 66. This is the age that they're eligible for full Social Security benefits. The average Social Security benefit is currently $1,470. If we multiply this amount by 12, we get $17,640 per year. Claiming benefits from 66 until 90 would net you around $423,000, though it could be more or less, depending on how the SSA adjusts benefits for inflation and if it makes any modifications to the program in the near future.
But if we subtract about $400,000 from our estimated retirement expenses calculated above, we end up with a range between $1.5 million and $2.1 million, which is in line with what Schwab's survey respondents expect they will need.
How to figure out what you actually need for retirement
These estimates can serve as a baseline, but if you want a truly accurate estimate of what you'll need for retirement, you have to create a personalized plan. You can follow the same steps as I did above, substituting your own estimates instead of the averages I used.
First, estimate the length of your retirement by subtracting your planned retirement age from your estimated life expectancy. Next, total up the living expenses you expect to carry into retirement, including food, housing costs, insurance, healthcare, travel, taxes, and anything else you can think of and multiply these expenses by 12 to get your estimated annual expenses. Then, multiply your annual expenses by the number of years of your retirement, adding 3% annually for inflation. A retirement calculator will do this for you.
It'll also ask for your estimated investment rate of return. Use 5% to 6% to be conservative. It should give you a total and a monthly savings goal. Subtract from these any money you expect to get from other sources, like a pension, employer 401(k) match, or Social Security, which you can estimate by creating a my Social Security account. The remainder is what you must save on your own.
Try to contribute at least as much as your plan recommends to retirement savings each month. If you can't, contribute as much as you can and try to raise your contributions by 1% of your salary per year. Look for ways to cut spending today to free up more cash for savings, like reducing how often you dine out and canceling subscriptions you can do without. You could also try pursuing promotions or starting an extra job to get more money coming in.
Even the best retirement estimates probably won't hit the nail on the head, but having some kind of plan is essential to saving enough for a comfortable retirement.