Where you are relative to others is less important than where you are relative to your goals.
The average retirement savings in the U.S. is $333,945, according to data from the Federal Reserve. But this paints an inaccurate picture of what the typical worker has. Averages are easily skewed by a few high earners.
Median statistics are generally more useful to look at, and in this case, they’re much lower — just $87,000. But even this is little more than an interesting statistic.
It doesn’t matter if you have more or less saved than the average American. If you want to retire comfortably, you need to build a retirement plan just for you.
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Why comparing your retirement savings to others is counterproductive
Knowing that the typical American worker has $87,000 in retirement savings might appear to give you a benchmark you can use to measure your progress. But this is a dangerous trap to fall into.
For one, this data looks at workers of all ages, and age has a huge effect on whether $87,000 is an adequate amount of retirement savings. It’s excellent for someone in their 20s, but it’s concerning for those in their 50s or 60s who may soon have to rely on their savings to cover living costs.
This figure also doesn’t tell you anything about the type of lifestyle the average American wants in retirement. Some probably hope to travel and buy expensive items, while others are more comfortable staying close to home and maintaining their current standard of living. One person might never want to work another day in their life, while another would get bored without at least a part-time job. You might plan for a 20-year retirement, while your neighbor with a serious health condition will only plan for a 10-year retirement.
All of these factors have a significant effect on how much you’ll need for your future. Rather than focusing on how you measure up to others, figure out exactly what you’ll need to meet your retirement goals, and work toward that.
How to build your personalized retirement plan
Creating a custom retirement plan starts by asking yourself what you expect your retirement to look like. Start with the following questions:
- When do I want to retire?
- How long do I think I’ll live?
- Where do I want to live in retirement?
- How do I want to spend my time?
- Do I plan to make any large purchases (vacation home, fishing boat, etc.)?
- Do I have any current expenses that will go away in retirement (business attire, transportation to and from work, etc.)?
Use your answers to these questions to help you estimate how much you’ll need to save. It’s possible you’ll be able to get by on less money than you do today. Some workers only need about 80% of pre-retirement income in retirement, but this varies a lot by person.
You won’t have to cover all of your retirement expenses on your own because you’ll get money from Social Security and possibly a job or a pension. Figure out the value of these so you know how much of your monthly costs you must cover independently.
Estimating your income from a retirement job probably isn’t too difficult. There’s plenty of data online about average incomes for various types of jobs. If you qualify for a pension, your employer can provide you with a better idea of how much you’ll get in retirement. And for Social Security, you can create a my Social Security account to estimate your monthly benefit at every possible claiming age.
Once you have a rough idea of how much your retirement income will amount to, subtract this from your total estimated retirement expenses to determine the monthly income you’ll need to save on your own. For example, if you expect $2,000 per month from Social Security and believe your retirement expenses will amount to $5,000 per month, then you must cover the remaining $3,000 per month on your own.
One popular retirement savings rule of thumb says you should save 25 times your annual required income to help your money last 30 years. In our previous example, if you had to cover $3,000 in monthly expenses on your own, that would be $36,000 annually. That would give you a retirement savings target of $900,000. But you might need more than this, especially if you plan for a higher standard of living or a longer retirement.
After you’ve determined how much you’ll need to save, figure out how to get there. A retirement calculator can help you learn how quickly your money will grow.
It’s usually best to be conservative here. Plan for about a 6% investment rate of return, even though your actual rate of return could be higher. Don’t forget to account for an inflation rate of roughly 3% annually, too.
Your calculator should help you determine how much you must save per month to reach your goal. If this amount isn’t feasible for you, you may have to modify your plan. Try out a few scenarios until you find one that works for you.