Retirement Reality Check: Big Number Blindness

By Michael Schoonmaker - July 15, 2017

Midway points are a great time for checking in. With the second half of 2017 underway, pause and take stock of how well your retirement plan is working for you. It may also be time to get a reality check for how much you'll need.

It can be difficult to get your arms around that big number and know if it will give you the retirement of your dreams or just enough to live on. A recent Wall Street Journal article explored perceptions around large, unwieldy figures by posing a simple question: Would you rather have $1 million or $5,000 monthly in retirement? While the two amounts are roughly equivalent based on annuity pricing, the discussion illustrates the importance of knowing what your retirement goal really means.

How Much for a Comfortable Retirement?

We surveyed investors in various age groups about their retirement readiness.1 The table below outlines what our respondents had to say about how much they'll need.

About How Much Do You Think You'll Need to Have Saved at Retirement to Retire Comfortably?

  Millennials Gen X Combined (plus Baby Boomers)
Less than $100,000 21% 18% 18%
$100,000-499,999 33% 31% 31%
$500,000-999,999 23% 18% 22%
$1,000,000 9% 18% 16%
$2,000,000 6% 8% 8%
$3,000,000 6% 8% 6%


Which amount is correct? That depends. Consider two important variables:

Longevity

While average life expectancy in the U.S. is around 79 years, many Americans will live beyond that. For example, for a couple aged 65 today, there's a 47% chance that either one of them could live to age 95. Will you outlast your savings if you live 25 or 30 years into retirement?

Lifestyle

Will you travel? What about expenses to keep up a car or home? These costs can vary greatly for each household.

Let's do the math for something everyone needs—food. What would food costs mean to your budget if you planned on living on savings of $100,000 for 25 years? Using today's costs, a retirement age couple will spend roughly $588 monthly for food at home   (or $3.22 per person, per meal). If you invested the money and earned 5%, you could withdrawal $578 monthly.2

Just buying groceries would eat up your whole budget and then some. This doesn't even account for dining out or splurging. Shocked? Does this sound comfortable to you?

This hypothetical situation contains assumptions that are intended for illustrative purposes only and are not representative of the performance of any security. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities.

Determining Your Number

Retirement experts recommend that at age 65, you should have saved an average of 11 times your final pay. However, studies show most workers will only save 8.4 times their final annual salary.3 That could amount to a shortage of well over $100,000 if your final salary is $45,000 a year.

Checkpoints Can Help Gauge Your Progress

Age Amount You Should Save By Age Retirement Savings Target (Making $45,000 annually)
35 1.4 x (annual salary) $63,000
45 3.7 x (annual salary) $166,500
55 7.1 x (annual salary) $319,500

Source: From the book, "Your Money Ratios: 8 Simple Tools for Financial Security" by Charles Farrell, 2011.

Redouble Your Resolve

While many of us let plans slide, losing focus on saving for retirement could meaning missing out on the lifestyle you hope to live. The good news is that you can start today to get on track. If you haven't already, create a budget for current expenses that can help you stash away more for retirement.

One of the easiest ways to put your money to work for you is to start an automatic investment. This strategy allows you to make regular investments, put time on your side so you can benefit from compounding.

Start your automatic investment today and put yourself on the path to the retirement of your dreams. Simply log in, then select Auto Invest. Or call us at 1-800-345-2021.

Michael Schoonmaker
Michael Schoonmaker

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      1 ORC International fielded an online survey for American Century Investments® from June 12–14, 2017 with 1,017 adults to better understand perceptions around retirement readiness across age groups.

      2 Source: Calculator.net. Hypothetical example assumes a 5% rate of return with withdrawals of $578 monthly over 25 years. It does not take inflation into consideration.

      3 The Real Deal: 2015 Retirement Income Adequacy at Large Companies, Aon Hewitt, 2015.

      The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.