You may have heard that in the U.S. a person needs to save at least $1 million to retire — or several million, depending on who’s giving the advice. But why so much?
The answer is simple in terms of math but complicated in real life.
The reason people keep hearing $1 million or more as the goal hangs on the idea that retirees should only withdraw about 4 percent of their savings each year. That way, their nest egg can stay large while they earn income from interest and dividends.
So, $1 million saved gets a person $40,000 of yearly income.
If saving that much sounds near-impossible, that’s because it is. Only a tiny percentage of Americans reach $1 million in retirement savings — around 3 percent do, depending on age — and the median savings at retirement is closer to $200,000.
Many financial companies say people should aim to save 10 to 12 times their annual salary by the time they retire, which is more flexible than telling people to save $1 million but still a very ambitious goal.
In the real world the overwhelming majority of Americans sock away far less. Save $200,000 by age 65 and you would have accumulated more than about half your peers.
The good news is, those lofty goals for retirement savings don’t take into account Social Security or pension payments, non-retirement savings or wealth that could be tied up in one’s home.
The average Social Security payment is about $2,000 per month, per person, but could be higher or lower depending on the age at which a person claims benefits and their work history. So that’s about $24,000 yearly, with annual increases tied to the rate of inflation.
Pensions have become increasingly scarce for private-sector employees in the U.S., but they are an important source of income for those who have them. And in South Carolina, about one out of every nine residents participates in the state’s pension plans, which cover everyone from police officers to college professors.
Add Social Security and a state pension, and a person could average about $40,000 in retirement income — the same as if they had socked away $1 million. Of course, most non-governmental workers no longer have pension plans, precisely because it takes a lot of money to provide a monthly benefit.
It’s understandable to be concerned about outliving one’s money. The cost of health care and elder care in the U.S. drives a lot of the worry, and considerable numbers of people go into retirement still paying off student loans they took out for themselves or their children.
One might need more or less in retirement depending on health, longevity, the resources and expenses of a spouse or partner, and where they live.
Different places, different costs
The cost of living can vary tremendously between nations, states and different places within the same state.
It’s not uncommon for people who haven’t reached their retirement savings goals to close some of the gap by moving somewhere less expensive. That might mean moving from Mount Pleasant to Summerville, or from California to South Carolina, or from the U.S. to Mexico, Panama or Costa Rica.
The financial website gobankingrates.com put together a list of the retirement savings needed to live in different states, based on federal cost-of-living statistics, Social Security income, and the concept of drawing down 4 percent of savings yearly. Note that their numbers aim to show how much would be needed in addition to Social Security.
The results were a list showing Hawaii as the most expensive place to retire, where a person would need to save up more than $2.2 million. Least expensive was West Virginia, but even there $712,913 was pegged as the retirement savings goal, in order to meet the estimated $28,517 in annual living expenses not covered by Social Security.
South Carolina was near the middle of the pack, between Pennsylvania and Minnesota, with an estimated $869,140 retirement savings goal. At least it was less than $1 million.
Working in retirement
People might not need to save so much for retirement if they plan to keep working, right? The thing is, according to the annual Retirement Confidence Survey, about three-quarters of working people say they plan to keep working in retirement, but fewer than 30 percent of retirees actually do.
Likewise, surveyed workers said they planned to retire at a median age of 65, but for actual retirees the median was 62 years old — or the midpoint where half are older and half are younger.
Expectations can clash with reality in good ways — such as realizing one has the financial means to retire earlier than planned — or in bad ways, such as having to retire for health reasons or because of a job loss.