This blog will continue the theme of how much should you be saving each year in order to meet the future goals that you have for yourself and your family.
In the previous blog, I used an individual who was in the 20 to 30 age bracket. This blog will focus on the next decade of ages – the 30 to 40 age bracket. If you have waited until this time to start being serious about saving for the future, you have lost about 10 years of your lifetime to build the wealth you want for your later years.
Two things have occurred in those ten years that have passed you by. The first is the annual amount you did not save and the second is the value of the 10 years of compounding that would have occurred for the amount saved. We can’t create a solution for these two lost opportunities, but we can compensate for them as we move forward.
Again, I will assume that you are single and living on the one income you have. I will look at different income levels today and I will take out the impact of the various federal and state taxes that you pay since these will not be part of your lifestyle when you reach retirement age in the future.
If you are earning about $20,000 today, you have about $16,600 to meet your expenses of housing, food, clothing, etc. Going forward, I will assume the 3% annual inflation for your income and for expenses. Your expectation may be that you will gain promotions and more education that will increase your pay faster than the 3% inflation, but I will not consider that in this section of the blog. I am also not considering any decreases in your income that might occur as you get older or should you happen to become unemployed for any period of your working career.
So let’s see what social security would provide as a benefit if your earnings were in this bracket today and increased each year until you reach retirement. In this scenario, your benefit would be about $23,355 annually if you retired at age 62. If you delayed the start of this benefit until your full retirement age (67), the benefit would increase to about $35,436 annually for you and to $44,639 if you waited until age 70 to start your social security benefits.
If your annual lifestyle expenses of $16,600 increased by 3% annually going forward, the annual cost to live at those various retirement ages would be about $42,900 at age 62 and $54,300 at age 70 . So social security is going to meet between 54% and 82% of what you need to live a comparable lifestyle in retirement. The rest will have to come from what you save. If you saved $1,000 each year for the rest of your working career until you reach age 67, and you earned 7% annually all those years, your money would last you until about age 84. If you increased the savings rate to $2,000 each year, the money would last you until age 100 and you would have some money to leave to heirs. If you made only 6% on your investments, your investments would run out at about age 96.
Today you are in a higher wage category than the $20,000 in the above example. So let’s look at someone who is making $45,000 today. After taxes, you would have about $35,000 to cover your lifestyle, a little more than twice what the previous example had even though you are making 2 ¼ times that example on a gross income basis. Again this is because you have a higher tax bill to pay for that higher income.
Assuming the same assumptions as the first example for inflation, etc., you need to save $4,000 each year and earn 7.5% annually in order to reach age 100 and live the same type of lifestyle that your $45,000 provides today. At this income level, the social security benefit at age 67 will provide about 56% of your estimated living expenses and the balance will be from what you save.
If you save less than the $4,000 per year and earn less than that 7.5% return, your savings will run out sooner. At 6% return and $3,000 saved each year, the money runs out at about age 77.
Should you decide you want to retire at age 62 in this scenario, your social security benefit would cover only 43%. This means you need to save more now or have a part-time job then in order to cover the shortfall.
Due to your ability to get promotions and the type of industry you work in, your pay is higher than the two previous examples. So what if you are earning about $71,000 per year today? You might be able to save $6,000 each year and earn that 7.5% return. In that case your money would get you to age 94 and your social security benefit at the full retirement age would cover about 50% of your lifestyle. If your return on investments was only 7%, you would need to increase your annual savings rate to $8,000 in order to support your lifestyle until age 100.
If you wanted to retire at age 62 in any of these scenarios, obviously you would need to save more each year going forward in order to cover the lower social security benefit you would be receiving. At the other end of the spectrum, you could delay the start of your social security benefit until age 70 and receive a higher monthly benefit for the rest of your life. The challenge in this case is you would have to be able to work additional years at a level of pay that would cover your lifestyle or save more money each year going forward to be able to live off your savings to make up what is lost from not getting the social security benefit.
If you compared the numbers in this blog to the earlier blog that was looking at your peers who are 10 years younger than you, you will see that the amount you have to save now is much higher than if you had started 10 years earlier. You may also realize that you need to make more money today if you want to have the same lifestyle as that younger person. This may mean that you need to work at a second job or volunteer for more overtime, if available, at your present job with the idea that the extra money goes to savings rather than being spent on current lifestyle items.
So what can you do today if you are older and have not started a consistent savings plan for our future goals:
- If you are looking at a job change for any reason, be sure to consider how the new employer’s benefit program will help you toward reaching your retirement type goals. Does the employer provide a match if you put money into their tax-deferred program? If you get a raise in that new job, look at putting that raise into your retirement savings pool.
- Be sure to review what the Social Security Administration has as your wage history by asking for your benefit statement and review its accuracy. Your work history is what determines your final benefits, so if it is not correct your benefit will not be correct. Have them correct the information on your work history.
- When you get that social security statement, be sure to also review what they say will be your benefits at different retirement ages. What you need to also understand are the limitations of this information – no increases in future benefits are included and, more importantly, the calculations assume you will be making the same wages each year for the balance of your working career. This is probably not what will happen to you, so the amounts reflected as your monthly benefits in retirement are too low.
- If you have been investing, review what the annual return has been for the asset allocation you have been using. Maybe you will see that you have been too conservative in what you are invested in and you might need to take on more investment risk in your portfolio to help grow those investments.
- Maybe you need to increase the amount you are saving each pay period. Start by putting that new raise or extra overtime pay into savings rather than spending it on a new toy of some kind.
- If you are in this age group and have not started to save or are not saving enough, this may be a good time to engage a financial planner who can help you with all the calculations and can provide you with a more focused roadmap that will fit your life and circumstances.
In my next blog, I will provide some data on the age group that you will be moving into in about 10 years – the 40 to 50 year olds. Hopefully when that happens you will be far along on your trip through life and you will have taken care of many of the issues that will be facing you then.
Francis St. Onge, CFP®
President
Total Financial Planning, LLC
Brighton, MI