Do You Have Enough Savings For Your Age? Find Out Here.
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Securing a comfortable retirement is more complicated than aiming for a single target.
How much should you have saved for your retirement?
This question surged into public prominence on Twitter last month, when MarketWatch tweeted out what it probably thought was an innocuous promotion for one of its articles:
By 35, you should have twice your salary saved, according to retirement experts: https://t.co/QoVA6EFpHJ
— MarketWatch (@MarketWatch) May 12, 2018
This advice avoids prescriptions that focus on having a certain amount at retirement in favor of one headline number: twice your salary at age 35.
But if you don’t have a salary — perhaps you’re an independent contractor, or you have several part-time jobs, or you’re a bitcoin day-trader — how do you calculate this number with any accuracy?
Someone who earns six figures in Silicon Valley might also be nearly as stretched by basic budget requirements, like housing and transportation, as someone making $30,000 a year in a heartland suburb.
The traditional numbers on retirement
A number of millennials, many of whom probably carry significant student-loan and other debt, took issue with the MarketWatch tweet, but there’s nothing particularly novel or revolutionary about the advice of its underlying article.
In fact, its advice is simply parroting guidance Fidelity Investments offered last year, which suggested you have these multiples of your salary saved by certain ages:
- By age 30 you should have saved 1x your annual salary
- By age 35 you should have saved 2x your annual salary
- By age 40 you should have saved 3x your annual salary
- By age 45 you should have saved 4x your annual salary
- By age 50 you should have saved 6x your annual salary
- By age 55 you should have saved 7x your annual salary
- By age 60 you should have saved 8x your annual salary
- By age 67 you should have saved 10x your annual salary
Typical advice for retirement savers also runs along these lines: save enough to pay yourself 80% of your most recent pre-retirement salary, or divide your desired retirement pay by 4%.
This sort of advice was easier to follow some decades ago, when you could work hard for the same company for 40 years and retire with a nice pension to supplement your Social Security benefits.
Consider costs of living
There are certainly weaknesses to this approach. For one thing, many retirement guides have limited, if any, information on the benefits of relocation — particularly when it comes to relocating overseas.
Nearly 90% of all jobs in the United States are found in urban areas, which have higher median incomes but also come with higher costs of living, particularly in terms of housing costs.
You could be earning $100,000 in New York City and still struggle to save, particularly if you live in Manhattan. The median rent for a two-bedroom apartment in the New York City metropolitan area is about $1,638 per month; in Manhattan, a two-bedroom apartment will set you back by roughly $3,895 per month.
For nearly $4,000 a month, you could easily rent a mansion in most parts of Montana or Arkansas, and unless you’re planning to house a whole tribe, you probably won’t need a mansion in your retirement years.
Living in Costa Rica can be even cheaper, with a three-bedroom two-bath house renting in the $500 to $1,000 range per month. Vietnam is cheaper still, as hundreds of people have reported spending an average of $500 per month on rent for a three-bedroom apartment that isn’t located in the dense centers of large cities like Hanoi or Ho Chi Minh City.
Another upside to becoming an expat is the significantly lower cost of medical care in most other countries, regardless of insurance coverage. If you’re only visiting instead of moving, taking advantage of the difference in health care costs is called “medical tourism”:
All of this is just to say that before you consider how much money you’ll need in retirement, you might also want to consider where you plan to retire.
Living on 80% of your salary would involve much different considerations in a major American city like Los Angeles or Washington, D.C. than it would in another country with a lower base cost of living.
Retiring safely at any age
Answering the “where” question only addresses part of the answer to your saving requirements. You also need to consider how — as in how long you plan to be retired. Whether you’re aiming to get out of the rat race while you’re still in your 30s or are expecting to enjoy decades of leisurely retirement, you should aim to amass a portfolio that won’t run out.
Withdrawing 4% of a million dollars gives you a retirement income of $40,000 a year, and this rate of withdrawal gives you a roughly 95% chance of your savings lasting you for 25 years, assuming an allocation of 50% stocks, 30% bonds, and 20% cash. That means that if you don’t want your money to run out eventually, you need to potentially withdraw much less than 4%.
You can play with these numbers yourself on Vanguard’s handy “Retirement Nest Egg Calculator” to see how long your expected savings will last at various rates of withdrawal.
More important than saving based on salary multiples or percentages of an expected nest egg is your ability to pay for an enjoyable and comfortable life in retirement — whatever that happens to involve in your case. If you feel the urge to travel the world in your golden years, those costs should be part of your saving considerations.
If you want to live close to your kids, you’ll have to incorporate the standards of living in their area into your calculations. You can start these calculations with some basic assumptions about the payouts you can expect to receive in retirement.
Building a foundation for a comfortable retirement
We can start with Social Security. Americans are eligible for Social Security once they reach the age of 62, but benefits can be increased by delaying retirement until a maximum age of 70. The “normal retirement age” is 67, but delaying your claim for Social Security benefits until age 70 allows you to earn an additional “credit” of 8% per year.
The calculations for Social Security benefits are complicated and involve the highest 35 years of your annual income, inflation indexes, and the actual calendar years of your 35 highest-earning years.
When you boil it down, the average monthly Social Security benefit is $1,404, which amounts to $16,848 (pre-tax) per year. That’s about 42% of a $40,000 annual retirement income, should you be aiming for that level of annual post-retirement spending.
You can also purchase certain life insurance policies that pay out after a set time frame, rather than on death or after you pass a very advanced age (usually 100 or 125 years). These types of insurance policies have what’s known as “maturity benefits.”
They can involve a straightforward return of the premiums you’ve paid (this is simply known as a “Return of Premium” plan), a combination of a policy with a debt fund investment (an “endowment plan”) that pays out modest returns, and a combination of a policy with a market-linked investment (a “unit linked insurance” plan) that can produce higher returns with the commensurate higher degree of risk that any stock market investment entails.
Purchasing life insurance with maturity benefits that are set to mature at the time of your expected retirement can give you access to a healthy lump sum of cash, but it does come with some tax considerations.
Investments that keep paying you back
Two other ways to secure solid retirement income involve well-traveled investing roads: dividend-paying stocks and real estate investments.
A rental property you purchase with a mortgage will set you back quite a bit initially, especially if it requires additional investment in repairs and upgrades. However, managing your upkeep expenses should allow you to reach profitability well before the mortgage is paid off.
Once the mortgage is paid, you can rely on reasonably consistent rental income every month, with some allowance made for necessary repairs and upgrades. If your mortgage is paid off before you retire — or even if you simply want to get out of property ownership when you retire — you can also sell the property for a lump sum of cash, similar to the payoff from a maturity-benefit life insurance policy.
A single property that produces $1,000 in monthly profit (rental income less upkeep) can bring your total pre-tax retirement earnings to $28,848, if you’re also drawing the average Social Security benefit mentioned earlier.
Raise your rental profits to $2,000 per month and you can combine it with Social Security payments to produce retirement income of $40,848, which is right in line with the $40,000 annual income achieved by drawing down a $1 million investment portfolio by 4% per year.
Keep in mind that rent should rise over time, while your mortgage costs will stay the same.
If you’d rather invest in stocks, you can amass dividend-paying stocks as a way to avoid drawing on the principal of your portfolio in retirement.
Following a dividend reinvestment plan, or DRIP, until you retire will further swell your portfolio’s value until you’re ready to start taking your dividends as cash payouts rather than additional shares.
In one example calculated with Investopedia’s dividend reinvestment calculator, you can start with a portfolio of dividend-paying stocks worth $50,000 at age 40, add $250 to it each month, and wind up with a total portfolio value of more than $750,000 that pays out $28,647 a year at age 65.
This assumes your dividend stocks increase their payouts by 5% per year, that your actual dividend yield is 4%, and that the price of the shares themselves grow by 5% per year. These are all reasonably conservative calculations based on recent market history. It’s a goal that should be attainable under a disciplined investing strategy.
How much do you really need?
Preparing for your retirement involves more than calculating your saving rate around a single number. It’s a complex consideration that involves a number of variables, including your age, your location, your predicted retirement expenses, and your rate of saving.
This is not to mention the expected rate of inflation from now till the time you plan to retire. If you can anticipate your needs in the future, you’ll be better able to plan for your needs to save for retirement today.