By Theresa Cagle Fry, Senior Vice President and Manager IRAs, Retirement & Education Planning
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Most people look forward to a time when they will no longer have to work. Whether retirement is close at hand or years down the road, you may wonder how much you will need to save to retire. Many Americans think $1 million is the magic retirement savings number. If you save $1 million, will it be enough for you to retire?
Just as during your working life where your day-to-day expenses are not the same as your neighbor, one person’s retirement may look very different than another’s. Determining how much you will need to save to be able to retire the way you want to is one reason why working with a financial advisor is so important. There are many factors to consider, and the answer is not the same for everyone.
Essential Expenses – Even Small Expenses Can Add Up
Essential expenses are typically those things you need to budget and plan for, such as your housing, utilities, vehicles and transportation costs, health care, debt payments, and groceries. Let’s take a closer look at groceries and see how even small expenses can add up.
Consider this example. If a meal costs you $10 today and you eat three meals each day during a 30-year retirement period, you will need $328,500 for your meals in retirement. If you are married, double that to $657,000 if you both want to eat.
Now consider what it would cost to eat if a $10 meal today goes up each year due to inflation. If the cost is inflated just 3% year over year, you would need $520,951 to afford your meals in retirement for the next 30 years and a married couple would need $1,041,902. That’s over $1 million just for a couple to eat three meals a day!
Of course, you may not spend $10 on every meal and where you live can determine how much food and other essential expenses cost you. But, nonetheless, you can see how a single expense of $30 per day – be it for food or health care – when under the influence of inflation, can easily require more than $ 1 million in savings to support a lengthy retirement.
Plan Also for Non-Essential Expenses
Although groceries are considered an essential expense, eating meals in restaurants would not be. Eating out, entertainment costs, travel, internet, and yes, even your cell phone are examples of non-essential expenses. Depending on how important they are to you, they can be factored into your retirement plan so you can see how the amount you need to save is impacted by continuing to include these types of expenses, and how often you include them, during your retirement years.
Social Security Is Not a Retirement Windfall
Although Social Security is a source of retirement income for most individuals, it should not be viewed as the only source of income you rely on in retirement. Social Security was designed as a supplemental source of income to be used in combination with your own personal and retirement savings. The Social Security Administration’s April 2023 Statistical Monthly Snapshot reports the average monthly retirement benefit is $1,789.94. That works out to about $59 per day. Even if you are only spending $20 a day on groceries, that is a third of the average worker’s Social Security benefit. It’s easy to see how when you factor in other essential expenses for housing, utilities, transportation and health care, Social Security alone is not enough.
Creating a financial strategy for retirement is an important first step but putting that plan into action is equally important. Participate in your employer’s retirement savings plan, such as a 401(k), if you have one available to you. Then, increase your contributions each year. You can contribute up to $22,500 from your salary this year to a 401(k) plan. If you are age 50 or older, you can make an additional $7,500 in catch-up contributions bringing the total to $30,000. If your employer doesn’t offer a retirement savings plan, contribute to a traditional or Roth IRA, if eligible. The annual contribution limit for an IRA is $6,500 (or $7,500 if you are age 50 or older). These types of accounts were designed specifically for retirement and provide tax advantages, such as tax deferral, that other savings accounts do not.
While there is no magic number for retirement savings, working with a financial advisor to develop a savings plan can help. Budgeting for your essential expenses so you can afford to eat and live in retirement and for those non-essential expenses that are important to you, gives you a starting point for determining what you need to save now to be able to retire at the age you desire and with the lifestyle you hope to live in retirement.