According to a survey of Bankrate, when asked about how much they need to fund their retirement, 61% of the Americans answered, “Don’t Know”. While the other 8% said that they need $250,000 for their retirement. And 15% said that they will need between $250,000 and 1 million which is also below the mark set by financial experts.
However, on average, Americans said they need around $650,000 after their retirement. Many old Americans aged above 73 said that they will need $500,000 in their banks. Those born in ‘generation X’ said that they will need $1 million as a retirement fund while millennials said they need $800,000.
It’s not only that the Americans do not know how much they would need after retirement, they aren’t saving enough either.
A survey was released in March by Bankrate in which it was stated that almost 20% of the Americans do not save at all from their annual income. While 16% of them said that they save 15% of their annual income and that’s what finance experts recommend. A quarter of them said that they save somewhere between 6 to 10% and 21% said they save less than 5% from their annual income.
It is important to understand how much money a retired person needs. But everyone has a different financial situation and one needs a few stages to calculate this amount. Fidelity Investments, a retirement plan provider company said that the rule of thumb is to have 10 times of your final salary if you are going to retire at an age of 67. The company also provided a timeline for savings:
- When you are 30 – Have one salary saved
- When you are 40 – Have three salaries saved
- When you are 50 – Have six salaries saved
- When you are 60 – Have eight salaries saved
- When you are 67 – Have ten salaries saved
Many early retirees use “4 percent rule” to calculate how much they will need for an early retirement. According to the rule, if one is able to withdraw 4% from the retirement savings, then he/she has enough money for quitting the job. The 4% rule enables you to find out how big the retirement portfolio should be.
The most important thing in pursues of retiring as a millionaire is to calculate saving rate. This way, a retiree can figure out how close he/she is to the ideal saving percentage. It is quite easy to calculate the saving rate: Divide the savings you made last year with the total gross income. For example, if a person earned $50,000 last year and then saved $5,000, it means that person saved 10% for the retirement and the saving rate is 0.1.
Investing in 401(k) plan is one of the best ways to save maximum from the annual income. Find a company which matches your situation and then take full advantage of it by getting free money. However, if your employer does not provide 401(k) plan, don’t worry, there are many other saving tools. Both traditional IRAs and Roth IRAs also offer tax-free money which can be considered as an alternative of 401(k) plan.
A major reason for this issue might be the lack of financial knowledge. A recent Federal Survey showed that only a few adults on average answered the five literacy questions. There is no trusted avenue for the Americans where they can find suitable advice for the retirement plan. Only a quarter of people managed to get advice from a financial adviser while every 5th person visits friends or family for the advice.
Start thinking about the retirement as soon as you start working, this is the irony of modern-day workplace. While living in the US, it is hard to save a portion from annual income and the only way of saving is by making it a part of your identity. Every retiree should have a goal of saving between 10 to 15% from annual income. To know further about setting retirement goals, check this Bankrate retirement calculator.