A professional financial advisor can help you set and achieve realistic wealth goals for retirement. But if you’re one of the 73% of Americans who doesn’t use an advisor, per YouGov, figuring out how much you need might be a challenge.
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The most recent Federal Reserve data suggests retirement-aged groups — those who are in the 55-to-64 age group and 65-to-74 age group — have a median net worth of $364,270 and $409,900, respectively. However, net worth may not be the best indication of retirement readiness. Read on for more details.
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According to a 2024 MassMutual study, the average American retires at age 62, which is earlier than the full retirement age of 67 for anyone born in 1960 or later, per the Social Security Administration.
According to the Federal Reserve’s most recent Survey of Consumer Finances, for 2022, Americans ages 55 to 64 had a median net worth of $364,270. However, the median increased to $410,000 for the 65-to-74 age group. The average of the medians for the two age groups works out to about $387,000.
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Net worth is an accurate measure of wealth, but it doesn’t take into account your expenses in retirement. Nor does it tell you how much cash you have available to pay those expenses.
Say, for example, you’ve paid off your home and have $400,000 in equity, plus $200,000 in retirement savings and no debt. Your net worth would be $600,000, which is well above the median, but only $200,000 of that would be available to cover living expenses — unless you borrowed against your equity or downsized to a less expensive home.
If, on the other hand, you had $200,000 in equity, owed $200,000 on your mortgage and had $600,000 in retirement savings, your net worth would still be $600,000. But you’d have a $600,000 nest egg to carry you through retirement. Compounding returns on the unused portion of your savings might be more than enough to offset your mortgage payment.
“In retirement, net worth takes a back seat to income, but income does come from assets,” Kelly Gilbert, principal fiduciary advisor at EFG Financial, told U.S. News & World Report.
Fidelity recommends having 12 times your salary saved for retirement at age 65, 10 times your salary saved to retire at 67 or eight times your salary saved to retire at age 70.
Those are baseline recommendations. Someone who wants to travel extensively in retirement might need more. A retiree who lives a more frugal lifestyle might need less.
Per the Social Security Administration, the national average wage index for 2023 was $66,621.80. So based on Fidelity’s suggestions, a person making the average wage should have over $666,000 to retire at 67.
You won’t really know how much money you need in retirement until you’ve calculated how much you’re likely to spend. Analyzing your current spending can help you project those future expenses.
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List all of your current expenses. Include housing, insurance, healthcare, clothing, personal care, utilities, food, transportation, taxes, debt payments, gifts and entertainment.
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Estimate how much you might spend on each of those items in retirement. Some costs, such as healthcare, are likely to grow as you age. Others could drop.
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Add a cushion to your retirement expenses to account for inflation. Inflation rates over most of the last 25 years have ranged from 1.5% to 4%.
The U.S. Department of Labor offers a free resource with worksheets for calculating assets, savings and expenses before and after retirement.
In the event your budget projections reveal that you need to bulk up your retirement savings, consider taking the following steps recommended by the Financial Industry Regulatory Authority:
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Contribute as much as you can to your workplace-sponsored 401(k) and/or individual retirement account.
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Cut back on expenses, and use the savings to increase your retirement savings.
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Delay retirement. Not only will you be able to save more by working longer, but you could also increase your Social Security benefit.
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Save or invest windfalls like inheritances, tax refunds and work bonuses.
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Check your retirement and other investment accounts for unnecessary, or unnecessarily high, fees.
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This article originally appeared on GOBankingRates.com: Why You Shouldn’t Use Net Worth To Decide When To Retire
