Kudos to the American public. They may not even know they collectively came up with the right number, but most people living in the United States correctly think they'll need around $1.3 million (in today's dollars) to retire comfortably. For some the number is bigger, while for others it's smaller. On balance, though, that's about the amount they'll need to reliably maintain the country's typical standard of living.
Unfortunately, most people living in the U.S. probably won't amass that much money... not because they can't, but because they don't take all the necessary steps to do so.
You don't have to be on the wrong side of that statistic, though, even if you're just an average earner.
It's ultimately all about future income
The number comes from insurer and brokerage outfit Northwestern Mutual. In the most recent iterations of its annual Planning and Progress Study, the underlying survey's respondents believe they'll need -- on average -- $1.27 million to retire comfortably.
The report doesn't define "comfortably," although it's not a stretch to presume it means maintaining an individual's current standard of living. To this end, the Census Bureau reports the average American household earns about $71,200 per year.
The funny thing is, that's right in line with how much a $1.3 million portfolio could produce when combined with average-sized Social Security checks.
As an example, let's create a portfolio for a hypothetical retiree. While most retirees will want their investments to generate plenty of income, a collection of nothing but dividend-paying stocks isn't exactly ideal. It makes more sense to limit equities to only one-fourth of your portfolio. Government bonds, corporate bonds, and real estate (via real estate investment trusts), for example, could each account for another one-fourth of an income-producing portfolio, keeping your assets reasonably well diversified as a result. Here's the sort of annual and dividend yield you can expect from such a portfolio right now using nothing but exchange-traded funds, or ETFs.
| Holding | Current Yield |
|---|---|
| Invesco S&P 500 High Dividend Low Volatility ETF | 4.4% |
| SPDR Portfolio Long Term Treasury ETF | 2.9% |
| iShares Broad Investment Grade Corporate Bond ETF | 3.4% |
| Vanguard Real Estate ETF | 4.3% |
| Average | 3.75% |
Surprised? These weren't the sorts of yields these instruments were sporting a few years ago. The past decade featured a long period of unusually low interest rates. Current yields are nearer long-term norms, although still below more typical levels.
More importantly, at an average yield of 3.75%, a $1.3 million investment in these four funds will produce on the order of $49,000 worth of income per year. And the REIT fund and the dividend stock fund will offer long-term growth prospects while you're holding them.
Don't count Social Security completely out
That's clearly still not the average annual household income of $71,200. There's a retirement income element not yet being considered, though: Social Security.
Yes, the program's got its problems. As it stands right now, the Social Security Administration may be forced to reduce its scheduled payments at some point in the 2030s.
Just keep these worries in perspective. The rhetoric is politically motivated. Social Security's projected shortfall could very likely be shored up nicely when it's politically expedient to do so. (That is, when legislators in charge are up for reelection.)
In other words, let's assume the SSA will be able to pay in full what's currently an average monthly check of $1,827. That's a little over $21,900 per year. Now combine that amount with the aforementioned $49,000 worth of annual dividend and interest income, and you get about $70,900 per year. That's just a few hundred bucks below the country's current average household income. Therefore, that $1.3 million target is looking about right.
Planning is the key, but not for the reason you think
As was noted, most investors will likely fall short of that target. Some of them will fall well short of it, in fact, largely by virtue of doing next to nothing to move meaningfully toward the goal.
That doesn't have to be the case, even for individuals and households earning just an average amount of money.
The key is time, or more specifically, using all the time you've got to your advantage. While it's great to commit 10% to 15% of your salary toward retirement savings, it's even better to start sooner -- when it comes to stocks, time does most of the heavy lifting.
Image source: Getty Images.
That's not to suggest you shouldn't even bother trying once you reach a certain age. If you're in your 50s or 60s, you can still amass a sizable stash even if it's never going to grow to $1.3 million. A lot can happen in a few years, particularly given that you're in your highest-earning years and can put some sizable chunks of money into the market.
Still, time is your biggest ally.
Perhaps the biggest takeaway for investors, however, is that it's to your advantage to start fleshing out realistic numbers like these as early as possible, and then update those numbers as often as needed.
Think about this: While a $1.3 million portfolio paired with Social Security payments might be capable of generating enough reliable income in the present environment, this wouldn't have been the case just a couple years ago when interest rates were at rock-bottom levels and dragging yields down with them. Anyone retiring in 2021 looking to build a respectable degree of income would have needed far more than $1.3 million. These people would have been forced to adapt. You will too, at some point in time.
Just don't panic when that time comes. Instead, stay cool, crunch the numbers, adjust your plan as needed, and then act. Even a loose plan is better than no plan, as you're more likely to stick with an actual plan when things get tough. You may even get to the $1.3 million mark without ever thinking you could.
