Planning for retirement savings often presents considerable challenges, chiefly because of the inherent unpredictability associated with lifespan and varying expenditure needs during retirement. This complexity makes assessing one’s progress toward retirement goals difficult, even for those who save systematically. Some individuals seek comfort in benchmarking their savings relative to others, using median or average figures to gauge their standing. However, such comparisons may provide an incomplete picture and could contribute to a false sense of security regarding retirement preparedness.
Data sourced from the 2022 Federal Reserve report reveals that the median retirement savings among all U.S. families possessing retirement accounts is approximately $87,000. The average (mean) retirement savings amount is significantly higher, at nearly $334,000, but this average is skewed upward by wealthier households with substantial savings. This distortion indicates that the median is a more reliable central tendency measure in assessing typical retirement savings levels.
It is pivotal to note that the $87,000 median only accounts for households with retirement savings, but a sizable portion of Americans do not have any assets allocated toward retirement. Specifically, only about 54.4% of families hold retirement savings. If the remaining families without retirement funds were included, the overall median savings amount would be even lower.
Consequently, individuals who have established any amount of retirement savings may be ahead of a considerable segment of the population. Nevertheless, possessing savings equal to or exceeding the median or even the much higher mean amount does not inherently indicate alignment with one’s retirement objectives.
The adequacy of one’s retirement savings is significantly influenced by the individual’s stage in life and the timeline before retirement. For instance, having saved $87,000 toward retirement would be commendable progress for someone in their mid-20s. Conversely, the same amount would be a source of concern for someone approaching their mid-60s and seeking to retire imminently. Hence, focusing solely on median savings figures provides an insufficient framework for evaluating retirement readiness.
A more nuanced and personalized strategy involves estimating one’s anticipated retirement expenditures and the expected income available during retirement, particularly Social Security benefits. By projecting annual living expenses in retirement and subtracting anticipated Social Security income, individuals can calculate the out-of-pocket amount they will need to finance through personal savings.
For illustrative purposes, consider an individual who estimates needing $60,000 annually during retirement but anticipates receiving $20,000 annually from Social Security benefits. This results in an out-of-pocket expense requirement of $40,000 per year. Applying a common financial planning guideline, multiplying this annual out-of-pocket need by 25 yields a targeted retirement saving goal of $1 million.
Tracking progress toward this personalized savings target provides a more accurate and actionable measure of retirement preparedness than comparing one’s nest egg to national averages. Moreover, initiating retirement savings as early as possible leverages the benefits of compounding investment income, easing the path toward reaching these financial targets. Regular contributions to retirement accounts further enhance the growth potential of savings and improve the likelihood of meeting retirement funding needs.