Before the Great Recession, millennials -- those born between approximately 1981 and 1996 -- hadn't saved much for retirement. But they've bounced back impressively since. The median millennial retirement fund hit $36,000 in 2017, according to the Transamerica Center for Retirement Studies, a whopping four times the $9,000 average from 2007.
That growth far exceeds the increases older generations enjoyed during the same period. Both Generation X and Baby Boomers more than doubled their retirement nest eggs over those 10 years, from $32,000 to $71,000 and from $75,000 to $157,000, respectively -- a robust climb, but nowhere close to millennials' success.
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How much is needed?
Kudos to millennials for the impressive increase. But this generation may still be lagging behind what they'll need for retirement. In fact, most members of every generational cohort are falling behind their own targeted goals, according to the Stanford Center on Longevity.
Millennials won't be able to rest on their laurels, that's for sure. Respondents to the Transamerica Center's survey on retirement estimated they would need $500,000 saved for life after work. Let's say a 35-year-old millennial has saved the $36,000 median amount, plans to retire at 67, and will receive the stock market's average historical return of 7% annually over the next 32 years. By then, that $36,000 figure will have grown to just $293,224.
But if we assume this person has a $50,000 salary and keeps up a steady retirement savings, putting away 5% of it annually over the same period? Then they would be comfortably over the half-million mark, at $548,507.
How much is enough?
The jury is out on whether half a million dollars will actually result in a comfortable retirement. It's estimated that retirees will need approximately 80% of their salary prior to retirement to live comfortably. The $548,507 figure would yield a comfortable 80% of a $50,000 salary until our hypothetical retiree is 82. After that, there would be no more money.
These figures do not include Social Security, however. That's currently estimated to provide about 40% of a retiree's income before retirement, leaving savings to fulfill the other 60%. For our hypothetical saver, the $548,507 could contribute 40% of a $50,000 income until the age of 100.
Millennials are anxious about the continuing existence of Social Security, however; 80% think it may not be around at all when they retire, according to the Transamerica Center. Despite these fears, though, Social Security is likely to be there in some form when millennials retire.
That said, our example above does pinpoint how necessary it is to have a firm sense of your own retirement plans. Again, all generational groups are falling short of their targeted retirement savings, with younger people lagging behind their elders. We can also see that estimates for how much people need to save for retirement vary, from 10% of income if the saver starts at age 25 to 27% if they start at 45. Currently, millennials are estimated to be saving a median of 7% to 10% of their income for retirement.
Is that enough? It's virtually impossible to give a yes-or-no answer that applies to everyone. Retirement plans vary enormously. How long you expect to live, where you expect to live, your spending patterns, your housing, your lifestyle, and your plans in retirement (travel? Be a couch potato?) all make a significant difference in how much you'll need.
How to determine the retirement savings you require
The solution is to have a thoughtful, concrete plan for how much you as an individual will need. Only 10% of folks in a Transamerica Center study, for example, had used a retirement calculator. Yet retirement calculators can run multiple scenarios and let you know how much to save for each.
Beyond calculators, there are two basic methods of estimating your retirement savings needs. One is to save an amount equal to 10 times your estimated income at retirement. A person expecting to earn $60,000 at retirement, then, would need to save $600,000. If you're 25 and making $25,000, how do you estimate what your income will be at the time you retire? A good rule of thumb is to assume a 2% salary increase annually over time.
The second is to use the 4% rule to calculate how much you need to save to replace 40% of your estimated income before retirement. (Remember, you need 80% of that in retirement, and Social Security is designed to replace roughly 40%.) Retirees can then withdraw 4% of their savings per year over 30 years.
To arrive at how much you need to save using the 4% rule, multiply the estimated amount you'll need yearly at retirement by 25. So if you expect your pre-retirement salary to be $60,000, you'd need 40% of that -- $24,000 -- from savings every year. Multiply that by 25 to find the number you need to save: $600,000.
Keep in mind that it's prudent to run several different scenarios for any retirement plan. If you're not comfortable assuming a Social Security contribution, for example, you can leave it out. If you want to make your retirement last more than 30 years, adjust accordingly. Both these rules are guidelines that can bring you to a safe and comfortable retirement.
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