How Much Income Would the Average American's Retirement Savings Give Them Each Year?

Being in a good financial position for retirement is really important. You don't want to spend your senior years worrying about not having enough money in your checking account to cover the necessities.

Unfortunately, far too many people are going to find themselves struggling with their personal finances as a senior. That's because the amount that most people have saved is simply not going to cut it.

To understand why, let's take a look at the amount of income the average person's retirement savings would provide.

This is the retirement income you'd have if you have the typical amount of savings

According to the Federal Reserve, the median value of retirement savings is $86,900. If an American had the typical amount of savings and they decided to follow a common rule called the 4% rule, they would end up with a retirement income of $3,476 per year.

The 4% rule is recommended by experts as a quick and simple way to determine a safe withdrawal rate. That's the rate at which you take money out of your brokerage account or 401(k) as a retiree. Taking out too much money could mean you go broke, not only because you could bring your balance down to $0 more quickly but also because the less you have invested, the lower the returns you'll earn and be able to reinvest.

Following the 4% rule means that in your first year of retirement, you would withdraw 4% of your account balance. The amount you withdraw would then increase each year to keep pace with inflation. So, if you had the median retirement account balance of $86,900 and you wanted to follow a safe withdrawal rule to avoid risking running out of money, you'd have just that $3,476 to combine with other income (like Social Security) and cover all your needs.

Social Security is meant to be part of a "three-legged stool" that only replaces about 40% of pre-retirement income, with the rest of the money you need as a senior coming from your brokerage accounts and pension funds. Experts recommend replacing a minimum of about 70% to 80% of pre-retirement income. So you need your retirement investments to replace between 30% and 40% of what you were earning to combine with Social Security and give you the recommended 70% to 80% of your salary to live on.

So, if your income is just over $11,500 a year, then the income of $3,476 produced by the median account would be sufficient to replace the recommended 30% of income. But if it's above that, you'll need more than the median saved by Americans.

How to make sure you have a secure retirement

If you want to beat the median savings by enough that you can easily replace the income you need, you should set a savings goal and stick to it.

• First, figure out how much your final salary is likely to be. To do that, assume around a 3% average annual raise until retirement (which is about the expected average annual raise).
• Decide whether you want investment income to replace around 30% of it or around 40%. If you want more money in retirement to travel or enjoy life, assume you'd want to replace 40%.
• Figure out how much income you'd need your retirement savings to produce. If you expect to be making $60,000 before retiring and you want to replace 30% of that with income from investments, you'd need your savings to provide $18,000 annually (remember, this is on top of Social Security payments).
• Multiply that number by 25 to see how big your retirement balance should be if you're following the 4% rule. So you would need $450,000 invested for your retirement plan to give you an $18,000 annual income.

The calculator on Investor.gov can help you break this big goal down into small ones so you can see exactly how much to invest each month. Set up an automatic transfer of this money by asking your employer's human resources department or benefits administrator to arrange for 401(k) contributions to be withdrawn from your paychecks or by signing up for automatic transfers with your bank or broker.

As you can see from this example, most people will need much more than median retirement savings to have enough income during their golden years. The good news is, even if you have a balance at or below the median now, you might have plenty of time left in your career to follow the steps outlined above to save much more.

Get started today, as the younger you are when you begin investing for retirement, the easier it will be to end up with the money you require as a senior.