It's Not All Doom & Gloom

You've probably seen news accounts that Americans believe they will need $1.2 million in savings to maintain their lifestyle after they retire. Barron's reported on a survey from Schroders that details how few people expect to have that much when the time comes. 

A couple of nuggets; only 30% expect to have $1 million, half of those surveyed do not think they will have $500,000 and some other grim variations on the same theme. Before getting into this, I do believe people will figure it out and make it work because they have to. I'm saying with a glass half full sentiment, people will figure it out. 

Needing $1.2 million in today's dollars seems a little high to me as a number across society. That assumes a withdrawal amount of $48000-$60,000 or 4-5 %. Gemini estimates that people born between 1970 and 1980 will get $2400/mo or $28,800 per year in today's dollars for Social Security. That's per person so $4800/$57,600 per couple. Those numbers assume each partner is making $62,030 so the couple is grossing $124,060. 

If this is an Arizona couple, they would be netting $97,502/yr or $8125/mo after putting 4% into their 401ks. If the couple born in 1970 bought a house in 2005 at age 35, the median mortgage payment would have been $1255 in the Phoenix/Scottsdale/Mesa area. Assuming 30 years, the mortgage would be paid off in 2035 when they are 65 and thinking about retiring. 

If they spend all $8125 every month, then their expenses in today's dollars would drop to $6870/mo after the mortgage is paid off. They are getting $4800/mo in Social Security so everything being constant, their retirement account only needs to generate $2870/mo or $34,440/yr. That means their retirement accounts would need to be $688,800 to sustain a 5% withdrawal rate, just over half of the generic $1.2 million. 

If their current spend includes two car payments, maybe they can get down to one car payment or maybe no car payments. If their kids successfully launch, then that would bring down their expenses a little more. The $2400 times 2 is their age 67 amount. If one of them waits one year longer to retire and take SS, then that $2400 would actually be $2592/mo. If they both delay a year then $4800 would become $5184/mo. 

Going through this exercise, I realize there's little to no margin for error and they are vulnerable if SS gets cut but it's not a desperate situation either. If this couple has a $30,000 gap between their Social Security and their spending needs and only have $100,000 saved, yes that will be a difficult place to be with some painful decisions to make. The example we built, there's a $34,000 gap and while having $1.2 million would be great, the scenario can do well with much less. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.