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How Far Does $300,000 of Retirement Savings Go?

This week I came across a recent survey by Wells Fargo which found (among other things) that when middle class Americans were asked how much savings they would need in order to support themselves in retirement, the median reply was just $300,000. That’s a much lower savings target than you typically hear discussed in financial media. And the press release about the survey sure seemed to indicate that the figure wasn’t high enough.

But just what kind of lifestyle can $300,000 of retirement savings support? I suspect it’s a higher standard of living than much of the financial services industry would have you believe.

What Level of Income Could We Expect?

With $300,000 in savings, if we assume a withdrawal rate of 4% per year, we get just $12,000 of annual spending. Fortunately, personal savings is not the sole source of income for most retirees.

As of 2012, the average monthly Social Security benefit for a retired worker is $1,230. In the case of a married couple, we can add $615 (half of $1,230) to account for a spousal benefit. (Of course, for unmarried people, there would be no second benefit. On the other hand, in a married couple in which both spouses worked, the total benefit would likely be higher.)

When we multiply the sum of those two monthly benefits by 12, we get a total of $22,140 in annual Social Security benefits.

$22,140 of Social Security, plus $12,000 in spending from savings gives us $34,140 of annual income.

And It’s Probably Tax-Free

Unlike the wage income and self-employment income that most people earn throughout their working years, Social Security benefits and investment income are not subject to payroll taxes.

In addition, at that income level, none of the Social Security benefits would be included as taxable income for federal income tax purposes. And the $12,000 of spending from savings — even if we assume it’s coming entirely from tax-deferred accounts — would be free of federal income tax as well because it would not exceed the standard deduction and personal exemptions.

How Far Does $34,000 Go?

Admittedly, given the high price of medical expenses and other day-to-day costs, $34,000 of income for a married couple doesn’t leave a lot of room in the budget for taking the family on cruises around the world — even if the $34,000 is tax-free.

On the other hand, it’s not poverty either, especially when we account for the facts that:

  1. There’s no need to carve a piece of that income out for retirement savings, and
  2. Many retirees (roughly 53% of U.S. citizens age 65 or older, as of 2009 [1][2]) own their homes and carry no mortgage debt.

There’s Still Cause for Concern

In my opinion, the primary cause for concern here isn’t that the $300,000 goal is too low. The bigger problems are that:

  1. Many savers won’t meet that goal due to insufficient savings rates, poor investment decisions, and unplanned early retirements, and
  2. Many retirees — even if they do meet their savings goals — will spend from their savings at too high a rate. (According to the study, when asked what percentage of their savings they expect to withdraw annually in retirement, the median answer was 10%.)

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  1. Looking at the survey, there are more disturbing facts, such as: 70% are not confident in the stock market, 75% are relying on guesswork rather than calculating their retirement needs, only 36% have a written plan, everyone underestimates out-of-pocket health care costs, 82% are unaware of 401(k) fees, retirement planning is often secondary to home remodeling and vacation costs in people’s minds, only 12% are saving more than 10% in their 401(k)s, 53% are not confident they have saved enough, and of course the median retirement savings is $25K.

    I could point out too that your 4% assumes a life expectancy of 25 years after retirement, which may or may not be the case. But life expectancy is increasing, which also leads to higher health-care costs unless we do something to bring health care under control (the controversial Obamacare being only a drop in the bucket in that regard). Personally as a single male age 64, I have a good deal more than $300K in my accounts and understand the benefits of an annuity, but I’m still planning to work a few more years and I’m not confident I’ve saved enough. I only hope the younger generation wises up and starts saving and investing more aggressively, but for the generation about to retire, I can only say that as a nation basically “we’re ******ed.”

  2. Larry with all due respect there is a reason retirement planning is 2nd to vacation planning.
    for example, I’m a 52 year old female. I figure I’m halfway smart, LOL. I’ve got a degree in Chemistry and work as such and yet, have you seen a prospectus??? I’ve tried reading and understanding them. I’d have better luck learning mandarian. Next let’s talk about financial planning. I’ve interviewed 3, (I live in NJ) average fee 15K. sorry at the present time I have 2 sons in college, I really don’t have an extra 15,000 to drop on some one tomanage my money so it will be a long time before I have a written plan in place. Which brings us to another point, I would love to max out my 401K but with a mortgage, 2 kids in college (and of course now every one advises them not to get burden with loans) and addicted to eating, 10, 12, 15% is not doable, oh and let’s not forget the 8 months living expenses all the gurus say we should have lying around.
    So I think the problem is not that the younger generation is unwise, I think they are well aware of the fact that they simple cannot do all the wonderful things the pundits say they should with their limited salaries. Don’t even get me started on the fact gas prices have risen a hell of a lot faster than my salary.

  3. I am getting better, I subscribe to this blog and others that are interesting but let’s not pretend that the information is easily understood (if it were, the blogger would be unnecessary) or that we even teach financial education. One is definitely not born with the inherent knowlege of what a variable annuity or how to chose one of the over 400 types.

  4. We all know there are no guarantees with the stock market, but since it’s the only game in town that has a reasonable expectation of actual real return over the next few years, that’s where the bulk of my retirement savings is. I am happy to finally hear someone say that we do not need $1 million to retire because according to my calculations (which match the article) I will do just fine with my $400,000 and social security. No, I do not have a written retirement or investment plan – my plan has been to save early, often and as much as I can, and put it all in low cost index funds with Vanguard. Retirement saving is not rocket science, all you have to do is read a few books and hang out on some personal finance forums – that’s all I’ve ever done and it’s allowed me to gather the information I needed to get the job done. You don’t need a financial adviser and you don’t need to read a bunch of prospectus mumbo-jumbo if you stick with a nice simple 3-fund portfolio from Vanguard, or even a target retirement fund if you want it even simpler. It’s not hard but the finance people on wall street don’t want you to know that since they prefer to try and scare people into saving unreasonable amounts and pay exorbitant fees. Tune out the noise and it’s easy.

  5. It does sound low (to my PF ears anyway)…

    It also sounds like there won’t be any traveling and living in a smaller city is the only way to retire. In which case, it is possible.

    As for owning your own home — are we also factoring in maintenance? What if the roof falls in after 30 years and on $34,000 (gross) they can’t afford to fix it?

    I’ve determined that to retire as early as I want, with what I want to do in retirement and living in France, I need $1M saved. It’s not that bad, I just need to get to work.

  6. If Eliza is still listening, I basically agree with Tara. You don’t have to (nor should you) spend $15K for some so-called financial advisor who is basically a salesman out to get your money with no fiduciary responsibility to you. Instead spend $30 and get three of Mike Piper’s books – Investing Made Simple plus his books on retirement and social security – and you’ll have all the information you need. Go also to the Bogleheads forums and lay out your financial situation; you’ll get some conflicting advice, but most of it will be useful.

    You could in my opinion invest in a Roth or traditional IRA using just Vanguard’s LifeStrategy Moderate Growth Fund and you’d be fine. If you have a 401k, look for the funds with the lowest expense ratios and contribute up to the full employer match. You don’t necessarily need eight months of an emergency fund just because Suze Orman says so; three months should suffice if you have a stable job. If the kids are in college they should do what they can to pay their own way. If 10% of your income is too much to save, save 8%.

    Bottom line is: you’re 52 and you don’t say how much you have saved for retirement. Let’s say you can work until 66-67; you still may have 20-25 years to live, women having longer life expectancies. It’s too late to leave these things to chance. Sorry to be blunt, but with perhaps 15 years left in the work force, you can do a lot to catch up, but you can’t keep making excuses. You may not need a million, but as Mochi says, you “just need to get to work.”

  7. Eliza,

    I am sure you are easily smart enough to come up with a reasonable written plan without spending $15K on a financial adviser. A prospectus is not made to be readable- the truth is that I rarely bother looking at them because I invest in index funds. As long as they do not change to actively managed funds I don’t have to worry about those details.

    >I would love to max out my 401K but with a mortgage, 2 kids in college (and of course now every >one advises them not to get burden with loans) and addicted to eating, 10, 12, 15% is not doable, oh >and let’s not forget the 8 months living expenses all the gurus say we should have lying around.

    As for 8 months of living expenses- I think that would be nice- but the reality is that is a huge amount of cash. I would try to build up a few thousand to cover emergencies as that can be very helpful.

    Life is full of tradeoffs- but I think that makes it even more important for you to have a plan that is likely to provide enough retirement income. You may find it makes more sense to have the kids take out some loans and put more into your retirement savings.

    -Rick Francis

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