The truth is that very few Americans have saved a million dollars by the time they are ready to retire. In fact, most have saved less than a hundred thousand. That does not mean they cannot retire, or even that they will have a miserable retirement. There are many ways to make the numbers work for you.
First of all, the average retiree currently only gets about $1100 - $1200 in Social Security benefits. That does not need to be true for you. If you work until your full retirement age of about 66, you should be able to increase your retirement income to at least $1800, and perhaps as much as $2400, depending on your past earnings. If you are married, your spouse will be able to get at least half that amount, even if they never worked. Therefore, a couple could have an income from Social Security of about $2700 - $3600 a month, without a penny of interest income from savings.
Once you know how much you will receive in Social Security benefits, compare that amount to what you currently have in monthly expenses. Let's say that you currently spend about $4500 a month, and you will receive $3,000 a month from Social Security. That means you are short about $1500 a month. Now look closely at your expenses. Will you have your mortgage paid off by the time you retire? Do you have other large debts, like money you borrowed to put your kids through college, that could be paid off by the time you retire? Let's say that you do have $500 a month in bills that will be eliminated when you retire. Now you are only short $1000 a month. Are there other expenses that will be less once you quit working? Will you save money on gas for your car, business lunches, parking, union dues, and other job related expenses? That may be another $200 a month in savings. Now you only need to make up $800 a month, or $9600 a year, in order to maintain your current standard of living.
Saving enough money to produce an extra $9600 a year seems much more manageable. If you have $160,000 invested with a 6% return, you will earn exactly the $9600 a year that you need. If you don't have that much saved, you still have a few choices.
First, you can continue working another year or two, which will increase the amount of Social Security you will earn and to give you time to save more money. If you work until you are 70, you could easily increase your Social Security to $3000 a month, and your spouse would get $1500. Now you're receiving $4500 a month, which is the amount you currently spend, and your problem is solved.
Another approach is to look for ways to downsize or simplify your lifestyle, such as moving to a smaller home, making do with one car, and cutting back on travel or entertainment. Just having a smaller mortgage could be enough to bridge the gap.
If you have managed to save some money in your retirement accounts, but less than $160,000, you could take the money you have and see if you can find an investment or annuity that will pay you more than a 6% return. The higher the return, the less money you will need. For example, AARP.com currently offers annuities starting at 6.1% for people who are 65, 7.5% for people who are 75, and even higher rates for older seniors. I'm sure that other companies will match those rates.
The bottom line is that, for most of us, trying to save a million dollars might be nice, but it is probably unnecessary. As always, you are welcome to leave comments and suggestions on any post and I will reply within 24 hours.
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