Saving for retirement is one of the most challenging financial goals you'll ever have to achieve, and it's becoming even more difficult as retirement becomes more and more expensive. The average American expects retirement will cost around $1.7 million, according to a survey from Charles Schwab, and saving for retirement ranks as workers' No. 1 source of financial stress.
It's easy to understand why so many workers are stressed about retirement -- the median amount baby boomers have saved for their golden years is just $152,000, a report from the Transamerica Center for Retirement Studies found. Considering the average American age 65 and older spends nearly $46,000 per year, according to the Bureau of Labor Statistics, that money will only last approximately three years in retirement.
Even more worrisome, though, is that too many workers aren't even thinking about their retirement goals. And new research shows that a significant chunk of Americans are putting their retirement at risk.
Many workers aren't setting retirement goals
Preparing for retirement isn't easy, but it's even more difficult when you don't have a goal in mind. Approximately 27% of Americans haven't given any thought to how much they should be saving for retirement, according to a survey from MagnifyMoney, and that simple mistake can easily wreck your financial future.
If you don't have a clue how much you'll need to last through retirement, you also don't know whether your current savings are on track. If you reach retirement age and realize you don't have enough saved, there's not much you can do about it at that point. Especially if you're going to need well over $1 million to last the rest of your life, you'll need several decades to save anywhere close to the amount you need.
Also, it may even be easier to save if you have a goal to shoot for. If you're just blindly putting money in your retirement fund whenever you feel like it with no idea whether you're actually saving enough, you run the risk of retiring with too little saved. Even if you do manage to sock away a couple hundred thousand dollars, that money might only last a few years in retirement.
Of course, when you're decades away from retirement, it's not easy to know how much you should be saving. However, there are a few ways to estimate your future costs and get an idea of what you should be aiming to have saved by the time you retire.
How to estimate your retirement number
To figure out your retirement number (or the amount you should aim to save by retirement), there are a few factors to consider first: how much you expect to spend each year, how many years you think you'll spend in retirement, and how Social Security will affect your retirement plan.
The amount you expect to spend annually in retirement is the foundation of your retirement plan, so if you underestimate this number, it could come back to bite you. Be honest with yourself here and try to come up with as accurate a number as possible. If you plan to take a lot of trips during your first few years of retirement, for instance, make sure to budget for those. And if you have health issues you expect could be costly as you age, don't forget about those expenses either.
Next, consider how long you expect to spend in retirement. The average life expectancy is increasing, with a third of today's 65-year-olds expected to live into their 90s or beyond, according to the Social Security Administration. But on the other hand, if you have health issues or other reason to believe you won't spend that many years in retirement, you may not have to save quite as much. While you can't predict exactly how long you'll live, estimating the best you can will pay off -- if you live even a few years longer than you anticipated, it could cost you hundreds of thousands of dollars more than you planned.
One other consideration to make is how much help you'll get from Social Security. While you won't be able to depend on your benefits for all your retirement expenses, they can help cover some of your bills. The average beneficiary receives $1,471 per month, according to the Social Security Administration, though the amount you'll receive depends on your income throughout your working years as well as the age at which you begin claiming benefits. To get an idea of what you'll be receiving, check your Social Security statements. Depending on how much you receive in benefits, you won't need to rely on your personal savings quite so much in retirement.
Once you have all these estimates in mind, run your information through a retirement calculator. It may also be helpful to try multiple calculators, since each one might use slightly different algorithms when coming up with your results. Although you might end up with several different responses, it could help to have a range of retirement numbers. There's no one right answer as to how much you should save, but at least you'll be in the right ballpark.
Planning for retirement can be stressful and overwhelming, but you could unintentionally be making it harder on yourself by not setting a retirement goal. It can be intimidating to think about how much you need to save, but having a goal in mind is the first step toward financial success in retirement.