The scary thing about retirement is not knowing how much it will cost you. And while you can do your best to research senior living expenses, including healthcare, ultimately, there are multiple variables that will dictate what your specific financial needs will amount to.
Still, it helps to have a retirement savings target to work toward, and today's workers think $500,000 will cut it, according to a recent Transamerica survey. (To be clear, that's the median amount workers feel will be necessary in retirement; not every worker thinks that specific amount is needed.) But while some seniors may be able to get by with a nest egg worth $500,000 at the start of retirement, for others, half-a-million dollars will inevitably fall short.
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How far will your savings go?
The U.S. Bureau of Labor Statistics reports that the typical senior spends around $46,000 per year in retirement. Meanwhile, the average senior on Social Security presently collects roughly $18,000 a year.
Let's get back to that $500,000 retirement savings target. If we use the 4% rule as our savings-withdrawal rate, that gives us $20,000 of annual income initially, plus a little more through the years as subsequent retirement plan withdrawals are adjusted for inflation. Assuming no other source of income aside from Social Security, entering retirement with a $500,000 savings balance would therefore leave the average senior with just $38,000 a year worth of income, which is well below the $46,000 spent by the typical senior.
That said, there is some wiggle room here. The 4% rule makes a lot of assumptions about seniors' lifespans and asset allocation in their retirement plans. Someone who retires on the later side and is still pretty heavily invested in stocks might get away with a 5% annual withdrawal rate, which would then result in $25,000 of annual income. Throw in $18,000 a year from Social Security (which could also go up as cost-of-living adjustments are implemented), and we're suddenly at $43,000 a year in income -- not as far off from $46,000.
Also, just because the average senior collects $18,000 a year from Social Security doesn't mean that's what every recipient is entitled to. Someone bringing in $24,000 a year in benefits may get by just fine with a $500,000 nest egg on top of that.
So does that mean that $500,000 in savings is enough money for you to retire with? Possibly, but possibly not. So much will depend on the lifestyle choices you make and the way your health evolves. It will also depend on what your Social Security benefits look like and what other income sources you may be privy to. If you're a retired teacher, for example, who plans to earn money substituting or tutoring children a few hours a week, you could easily boost your senior income by thousands of dollars a year.
The point, therefore, is that while $500,000 may be a reasonable savings target to aim for, it might also cause you to fall short. A better goal, therefore, may be to aim to retire with 10 times your ending salary socked away in savings, though that's also not a perfect measure. In fact, there's no specific number that's guaranteed to bring you financial security in retirement, but if you plan out what your senior lifestyle will look like, read up on expenses, and push yourself to save as much as possible, there's a good chance you'll leave the workforce with enough money to stay comfortable and content during your later years.
