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Many Americans are worried that they will not have enough money to retire. As the cost of living continues to rise, nearly one-third (30%) of Americans are not confident they will be able to cover day-to-day expenses for the rest of their lives, and 63% of Americans believe the dream of retiring between the typical age of 65 and 70 is unattainable, a recent survey found. TIAA Survey found.
However, money expert Ramit Sethi believes these fears are overblown. He said in a recent interview, “What if everyone is nervous about retirement that’s actually wrong? The truth is that you can retire with more than you think.” Youtube video.
He believes that if you really do the math, you may be pleasantly surprised by your financial circumstances. Here’s the math of retirement Sethi wants everyone to know.
Ask yourself these 3 questions to plan your retirement
Sethi said to figure out how much money you’ll really need to retire, ask yourself three questions:
- When do you want to retire?
- How long will you live?
- How much will you need each year?
If you don’t have answers to the first two questions, Sethi said assume the retirement age is 65 and you’ll live 30 years in retirement.
Why retirement often costs less than you think?
When it comes to answering the last question, Sethi said you’ll spend significantly less per year in retirement than you did in your working years.
“Retirement spending typically looks quite different,” Sethi said. “For many retirees, life often becomes simpler and less expensive.”
This is because there are many expenses you no longer have to worry about, such as commuting costs, work clothes and, ideally, mortgage payments.
How Social Security Can Cover Your Retirement Costs
Although Social Security probably won’t be able to cover all of your retirement costs, it can offset the total amount you need in your savings.
“If you made the average salary around $62,000 … your Social Security check would be about $28,000 a year,” he said.
That’s about $2,300 per month, and the amount you receive increases every year with inflation.
Use the 4% Rule to Estimate Your Retirement Savings Goal
If you want a rough idea of what your total retirement savings goal should be, Sethi recommends using the 4% rule — divide your current salary by 4% to find your personal number. Using this calculation, if you made an average salary of $62,000, you would need about $1.5 million in retirement savings.
“This means that if you have $1.5 million in your retirement account, you can safely withdraw $62,000 per year,” Sethi explains. “For me, it’s a revelation. It tells me, I don’t need $5 million or $20 million. I need $1.5 million.”
Started saving late? you can still hold on
By using the 4% rule, you will probably end up with a number that is higher than you actually need.
“Social Security will cover some of this,” Sethi said. “Maybe your expenses will go down.”
He believes that if you start saving for retirement at age 45, you can still save enough to retire comfortably if you save $250 per month and grow it over time.
“I don’t think you guys realize how powerful compound interest really is,” Sethi said. “Even starting late, by age 65, you could have saved hundreds of thousands of dollars.”
If you start earlier, saving a million dollars by retirement age is realistic.
“That’s a little more than $37,000 per year that you can safely withdraw using the 4% rule,” Sethi said. “Add in Social Security, which is about $26,500 a year — you’re looking at a more realistic retirement income with more than $60,000 you can spend each year.”
Match your retirement savings to your lifestyle goals
Another caveat to your retirement calculations is that you won’t need as much money in retirement if you choose to live a simpler lifestyle.
Sethi said, “If you’re a retiree living close to home, that probably means fewer flights, lower hotel bills, maybe a paid-off house. So, let’s say you want $50,000 a year in retirement spending, using the 4% rule, that tells you you need about $1.25 million invested.”
If, instead, you want to travel three months a year and are aiming to spend $100,000 per year, that means you’ll need a portfolio worth $2.5 million.
“Just remember, in both of these scenarios, you probably won’t need your portfolio to cover everything because you will have Social Security assistance,” Sethi said.