You're not alone if you’re worried about not having enough savings for a well-situated retirement. 70 percent of Americans are concerned about this as well. People understand the importance of saving, but the details get hazy from there. How much money have you set aside for your golden years? How much must you save each year? How do you invest in your 401(k)?
The answers to these questions will vary for each individual, but embracing these five unbelievable retirement facts will help you create an educated plan personalized to your specific goals.
1. The average amount saved for retirement should be $650,000
Many people are unsure how much money they will need in retirement. There is no universal solution, which leads to a lack of education on the subject. When you retire, the money from Social Security, insurance, or savings will finance your living expenses. People are relying more and more on their savings as pensions are being phased out.
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The median retired couple earns $57,000 a year, and $31,000 of that comes from Social Security. The $26,000 shortfall must be made up of investment profits. To remain under the 4 percent rule guidelines, retirement savings must range between $650,000 and $860,000 (and that's only to sustain a median income, assuming no taxation). Because of inflation, the figure would be higher for people who will retire in the years to come.
According to polls, a majority of Americans believe they would only need about $300,000 to retire comfortably. Worryingly, the average American over the age of 65 has just around $200,000 in retirement savings. That is obviously insufficient. The math just doesn't add up. You must start saving and investing early in your career to ensure that you will be covered later on.
2. An average couple will need $300,000 in assets to cover medical costs in retirement
Out-of-pocket medical expenses vary by person, but it is normal to incur the majority of those costs in your later years. Medicare provides some coverage, but you're still responsible for many of the expenses.
The $300,000 figure is, of course, an approximation based on projected expenditures and growth rates. However, a retired couple can fairly expect to pay that much to cover all of their medical needs for the rest of their lives. Given that most Americans think they will only need $300,000 for a comfortable retirement, medical appointments, medicines, and hospital stays are unlikely to be covered in most people's budgets.
3. Your savings’ value falls over time
Inflation poses a significant danger to your retirement savings. With a 3 percent annual inflation rate, the purchasing power of the US dollar is reduced over time. For the previous twenty years, that number has been very close to 2%, but there are indications that there will be an era of higher inflation as the economy gets back on its feet after the COVID-19 pandemic.
For retirees on a limited budget, that could be a serious difficulty. Do you intend to live on $100,000 annually when your retirement starts at 65? The amount would be spent as if it were $75,000 by the time you're 75, assuming a 3% inflation rate. Even if the value of your assets does not decline, the value of your account will.
Fortunately, inflation can be combated. One common strategy is to have some stock exposure in your investment portfolio because equity prices rise with inflation and tend to grow over time. Consider including Treasury Inflation-Protected Securities in your fixed-income portfolio, as their value and interest payments change with inflation.
4. You won’t keep the whole amount of your 401(k) savings
Calculating your tax obligation in your retirement account can be frightening. The IRS defers taxes on contributions to some retirement accounts, such as 401(k)s, IRAs, 457 plans, and 403(b)s. The money is saved and grows without being taxed.
The IRS, on the other hand, would eventually get its piece of meat. Ordinary income taxation applies to distributions from all these accounts. Today's average 401(k) holder, aged 65 years of age, has $216,000 in their account. Tax rates differ by state and adjust over time, but retirees typically have effective income tax rates ranging from 10% to 15%. It’s reasonable to anticipate that the federal government will take $30,000 from your account over time. If tax rates rise in the future, that figure could be much higher.
5. You must prepare for a retirement that’s longer than 20 years
Longer life spans have been achieved as a result of medical advancements. For a married couple that reaches the age of 65, the longer-living spouse has an average lifespan of more than 20 years. At least one participant of a retirement plan is likely to spend the next 25 years traveling, eating out, and paying for healthcare.
One of the main reasons pensions have fallen out of favor is that a 25-year retirement plan would have been unthinkable decades ago when pensions were popular. Individuals are, unfortunately, left to their own devices as a result of this. Retirees should use the following strategies to mitigate the threats faced by aging and inflation:
Follow the 4% rule.
To provide growth in your early retirement years, you need to maintain a well-balanced investment portfolio of both stocks and bonds.
Consider buying an annuity product that provides the annuitants a guaranteed income for the rest of their lives.
