In an era marked by economic fluctuations and rising living costs, Americans’ visions of a comfortable retirement are reaching new financial heights. Recent data suggests that the average American believes they will need approximately $1.46 million to retire comfortably, a figure that starkly contrasts with the actual savings most currently possess.

The $1.46 Million Benchmark

A 2024 study by Northwestern Mutual highlights a significant increase in the retirement ‘magic number’—the amount individuals believe they need to retire comfortably. This number has jumped to $1.46 million, up 15% from the previous year’s $1.27 million and a substantial 53% from the $951,000 reported in 2020​​. This uptick far outstrips the current inflation rate, suggesting that more than just economic indicators are at play.

Generational Expectations and Realities

The expectation varies notably across different generations. Gen Z and Millennials are setting the bar high, with targets over $1.6 million, driven perhaps by their longer anticipated lifespans and potentially more expensive retirement goals​. In contrast, Gen Xers and Baby Boomers have somewhat lower expectations, though they are not insubstantial. Interestingly, high-net-worth individuals envision needing nearly $4 million, underscoring the varied perceptions of ‘comfortable’ retirement across economic brackets​​.

Despite these lofty aspirations, the average American has less than $89,000 saved for retirement, illustrating a daunting gap between dreams and reality​ (Northwestern Mutual)​. This disparity points to a potential crisis as populations age and savings lag behind needs.

The Impact of Inflation and Economic Trends

Inflation, though moderate in terms of annual rates, has a compounded impact over time, particularly on fixed incomes and savings that do not keep pace. The expanding expectation for retirement funds may partly reflect growing awareness of these challenges. Additionally, the shifting economic landscape, including job market volatility and the evolving nature of retirement itself, plays a role. The traditional notion of retirement is being redefined, increasingly seen as a phase of life where active living and high costs continue much as they did during employment.

Strategies for Closing the Gap

To bridge the gap between current savings and retirement goals, financial experts emphasize starting early. The power of compound interest means that savings grow exponentially over time, so the earlier one begins, the better the potential outcome. Moreover, diversifying retirement savings through a mix of traditional 401(k) plans, IRAs, and Roth IRAs can offer tax advantages and income stability in later years​​.

Educational efforts on financial planning are crucial, as understanding the basics of investment, the benefits of early savings, and the impact of taxes can empower individuals to take more effective actions toward securing their retirement. Additionally, considering alternative retirement income sources like annuities and life insurance can provide further buffers against volatility and longevity risk​​.

The Role of Financial Advisors

Given the complexities of modern financial markets and retirement planning, professional advice can be invaluable. Financial advisors can tailor strategies to individual needs, taking into account factors like expected lifespan, health costs, and lifestyle aspirations​. They also play a critical role in educating clients about the realities of retirement costs and how to plan for them effectively.

Looking Forward

As the average retirement savings goal continues to rise, the gap between what Americans have and what they believe they’ll need underscores a vital need for enhanced financial education and planning. The narrative of retirement is changing, and with it, the strategies for achieving a secure and comfortable later life. Addressing this issue will require concerted efforts from individuals, financial advisors, and policymakers alike to ensure that the dreams of retirement do not outpace the means to achieve them.

In sum, while the goal of $1.46 million might seem daunting, it is not unattainable. With strategic planning, early savings, and the right financial advice, Americans can work towards closing the gap between their current savings and their retirement aspirations.

Estimating Annual Income Needs for Retirement

In planning for retirement, a key assumption is the portion of pre-retirement income that should be replaced to maintain a similar lifestyle in retirement. Financial experts generally recommend aiming to replace between 70% to 90% of your annual pre-retirement income through a combination of savings and Social Security​​. This percentage can serve as a useful guideline for estimating the annual income you’ll need once you retire, helping to shape how much you should be saving now.

For example:

If someone earns an average of $63,000 annually before retirement, they should plan to have access to about $44,000 to $57,000 per year in retirement to sustain their standard of living​​. This approach takes into account changes in expenses—like reduced costs from commuting and work attire, against potential increases in healthcare or leisure spending.

Setting these targets can help guide your investment choices and saving strategies, ensuring you are financially prepared for retirement. Remember, the exact percentage can vary based on individual circumstances, including expected retirement lifestyle and other income sources.

Looking for Guidance?

If you’re seeking personalized advice, consider reaching out to a financial professional.. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. If you would like a personal referral for a first appointment, please call us at 877.476.9723 of contact us here to schedule an appointment with an independent trusted and licensed financial professional.

Source Disclaimer

Northwestern Mutual’s 2024 study on retirement savings and expectations: Northwestern Mutual
NerdWallet’s guide on retirement planning and income assumptions: NerdWallet

The information provided in this content is based on sources believed to be reliable and accurate at the time of writing. However, the data and statistics mentioned are subject to change and may not reflect the most current developments or research. Readers are advised to consult additional resources and verify the information before making significant financial decisions. This content is intended for informational purposes only and should not be construed as financial advice.

Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities. Learn more about my extensive background and expertise here

The post The Rising Cost of Retirement Dreams first appeared on SafeMoney.com.

Navigating the path to a secure retirement can seem daunting. With numerous investment options, economic volatility, and increasing life expectancies, understanding how to effectively manage your retirement accounts is crucial. Diversifying these accounts is not just wise—it’s necessary. It ensures financial stability and sets you up for a comfortable retirement.

Why Diversification Is Key

Diversification stands as the cornerstone of sound financial planning. It involves spreading your investments across various assets to minimize risk. In retirement planning, this means allocating your savings across different types of retirement accounts. Each type offers unique tax advantages and withdrawal implications. Through diversification, you reduce risk and enhance your potential financial returns.

Understanding Different Retirement Accounts

Effective diversification starts with knowing the different types of retirement accounts available:

• Traditional IRA and 401(k): These accounts feature tax-deferred growth. You pay taxes on withdrawals during retirement, potentially at a lower rate.
• Roth IRA and Roth 401(k): You make contributions with after-tax income. This setup provides tax-free withdrawals under certain conditions, benefiting those expecting higher tax rates in retirement.
• SEP IRA and Solo 401(k): Best for self-employed individuals or small business owners, these accounts allow for larger contributions, ideal for those who may start saving for retirement later or who have fluctuating incomes.

Recognizing the specifics of each account type is the first step in crafting a tailored retirement plan that fits your financial situation and goals.

Balancing Tax-Advantaged Growth

A crucial aspect of retirement planning is balancing immediate tax benefits against future tax savings. The principle of tax-deferred triple compounding plays a vital role here. This powerful mechanism boosts your investments in three significant ways:

• Investment returns: Earnings generate further earnings through reinvestment.
• Principal growth: Funds grow without current tax deductions, allowing more of your money to compound.
• Tax savings: The money you save by not paying taxes annually also compounds, providing even greater growth potential.

Leveraging this compounding effect in tax-deferred accounts like traditional IRAs and 401(k)s can dramatically increase your retirement savings.

Incorporating Annuities for Guaranteed Income
Annuities often get overlooked in retirement planning, yet they offer valuable benefits. Fixed annuities, for instance, provide a steady, predictable income that does not depend on market conditions. This feature is crucial for maintaining financial stability and peace of mind, complementing withdrawals from other retirement accounts.

Regular Reviews and Adjustments
Life is unpredictable, and so are financial markets. Regularly reviewing and adjusting your retirement plan is essential. Changes in economic conditions, personal goals, or lifestyle choices might necessitate adjustments in how you balance investments among different accounts, modify contributions, or even rethink your overall retirement objectives.

Seeking Professional Guidance
The complexities of retirement planning can be overwhelming due to intricate tax implications and regulatory considerations. Consulting with a financial advisor can provide immense benefits. They offer personalized advice that considers your entire financial landscape, helping you make well-informed decisions that enhance your retirement preparedness.

Maximizing Contributions and Utilizing Catch-Up Provisions
To fully benefit from your retirement accounts, it’s crucial to maximize your contributions up to the legal limits. For individuals nearing retirement age, taking advantage of catch-up contributions is particularly advantageous. These provisions allow people over 50 to contribute extra funds to their retirement accounts, accelerating the growth of their nest egg during the critical years before retirement.

New Topics for Comprehensive Retirement Planning

Managing Inflation Impact
Inflation can significantly erode the purchasing power of your retirement savings. Investing in assets like Treasury Inflation-Protected Securities (TIPS) or real estate can help mitigate this risk. These investments often outpace inflation, preserving the value of your savings.

Planning for Healthcare Costs
Healthcare costs typically rise as you age. Planning for these expenses, including Medicare, supplemental insurance, and potential out-of-pocket costs, is crucial. This ensures you are financially prepared for health-related needs without compromising your retirement savings.

Understanding Social Security Benefits
Social Security benefits can complement other retirement income streams. Maximizing these benefits involves understanding the best time to claim them based on your financial situation. This can significantly affect your retirement income and requires careful planning.

Estate Planning and Will Preparation
Preparing a comprehensive estate plan, including wills, trusts, and powers of attorney, ensures your assets are distributed according to your wishes. This planning can also help minimize the tax burden on your heirs, ensuring they benefit fully from your legacy.

Addressing Psychological Aspects of Retirement
Adjusting to retirement can be challenging. It often involves changes in daily routines and identity. Planning for this transition can help you find new purposes and maintain your well-being in retirement.

Housing Options in Retirement
Choosing the right retirement housing, whether downsizing, moving to a retirement community, or exploring assisted living facilities, impacts your retirement planning and expenses. Each option has financial implications that need consideration.

Leveraging Technology in Retirement Planning
Modern technology aids in retirement planning through tools like online calculators, financial management apps, and investment tracking platforms. These resources can simplify managing your finances and help you stay informed about your investments.

Conclusion: Charting a Path Forward
Building a comprehensive retirement strategy involves more than spreading investments across various accounts. It requires creating a plan that adapts to both economic and personal changes. With careful planning and strategic investment, achieving a secure, financially stable retirement is within your reach. Remember, the most effective approach is customized to your unique financial needs and focused on long-term success.

Looking for Guidance?

If you’re seeking personalized advice, consider reaching out to a financial professional.. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. If you would like a personal referral for a first appointment, please call us at 877.476.9723 of contact us here to schedule an appointment with an independent trusted and licensed financial professional.

Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities. Learn more about my extensive background and expertise here

The post Mastering Retirement Account Diversification first appeared on SafeMoney.com.

James C. Molet at Retirement Savvy runs an excellent feature called Living Frugally that provides excellent advice on cutting daily expenses, but let’s focus on some of the big-ticket expenses that are eating up your income and future retirement savings.

Downsize Your Cars

Do you really need the newest, fanciest model of your favorite automobile? Do you still need more than one vehicle? These are important questions to discuss with your spouse or partner as you approach retirement. In addition to monthly payments, running and maintaining a car can be expensive when you factor in gas, insurance, and other regular maintenance. If you still need to keep additional cars, you could trade in your car for an older and less expensive model, ending up with either no car payment or a significantly smaller one.

Insurance Policies

Depending on your situation, you may look at ways to lower insurance costs. You might consider updating your car insurance policies and homeowner’s insurance to lower deductible options. Many people self-insure against smaller losses to reduce their premiums and save hundreds of dollars annually. On the other hand, different insurance products can help you against unexpected life events or situations – which could otherwise be costly occurrences. For one, a life insurance policy can help protect your loved ones against the tragedy of a breadwinner passing away, leaving a tax-efficient means for replacing any lost income.

Also, let’s discuss some thoughts on health costs. You should also search out the most cost effective prescription drug plan to see if you can cut down on either premiums or your copays on prescriptions. On a similar note, while this won’t help to reduce your pre-retirement spending, you should make sure to sign up for Medicare on time. You can enroll up to three months before your 65th birthday. Enrollment is open for seven months. There is a 10% premium increase for each 12-month period of delayed enrollment.

Downsize Your Home

There is some debate whether it is a good idea to downsize your home. On one hand, you are living in a valuable asset that has increased in value since you purchased it. You could downsize and potentially end up in a home that costs less to run and insure. You might also benefit from lower property tax rates and not have to get a mortgage. On the other hand, if you don’t have a lot of equity built up in your home and live in an expensive area with high property tax brackets, you might not end up in a better situation.

If downsizing will work for you, think about moving to a less expensive location. Places like Florida, Arizona and Nevada are popular with retirees for a number of reasons, not least the lower costs of living in attractive and safe neighborhoods. These states also offer beautiful weather and plenty of opportunities to get out and enjoy the outdoors.

Also, if you keep cell phones and maintain a landline, consider getting rid of your landline. It’s redundant to pay for both. 

Scrutinize Your Financial Portfolio Fees

As you approach retirement you should be looking at ways to convert your investment and retirement portfolios to even more conservative, risk-adverse positions. While you’re doing this, review the fees that you are paying. Fees and expenses cut into your wealth and if you can transfer to options with lower associated fees, you will save money and increase your nest egg.

If you’re in your fifties and in the “retirement red zone” – the period of 5-10 years before your target retirement timeline – now it’s important to hold onto what you’ve saved. Consider looking into new strategies which offer means to preserve your wealth and can provide more income certainty when you retire. Depending on your situation, annuities can be used to bolster any gap between your projected retirement expenses and monthly income – or even used to generate income beyond what you’re getting from Social Security or maybe a pension.

Pay Off Your Debts

Making bigger payments to get rid of debts might sound counterintuitive when you are trying to cut expenses before retirement to try to live on less, but consider the alternative. While you are making bigger payments on your car, mortgage, or credit cards you will be reducing what you are living on today while also reducing your future expenses. A mortgage or other home equity loan is frequently the largest expense for any household. If you can enter retirement mortgage free, you will have more of your retirement income to cover your other expenses.

In your pre-retirement years, you are in a unique situation to calculate your expected retirement income and test drive that budget to see if it will actually work for you. Many people actually experience a decrease in their expenses when they no longer have to commute every day or wear expensive suits and professional clothing. If you are in your mid to late stages of retirement planning, try living on your projected budget. It may help you to identify other unnecessary expenses that you can either reduce or eliminate.

Over half of Americans over the age of 50 have not saved for retirement at all. If you’re reading this blog, you’re probably a member of the half who have saved something. When you are doing the math and working on your retirement income projections, don’t worry if the numbers don’t seem to be enough. Many people find it easier to save more and pad out their retirement nest eggs after the age of 50. After all, it’s when their kids are grown and out of the house, mortgages are paid off, and student loans can be a distant memory.

If you’re ready for personal guidance with your retirement income and financial goals, SafeMoney.com can help you. Visit our Locate a Licensed Advisor section to connect directly with a financial professional and request a no-obligation strategy session. And should you have any questions or need a referral, call us at 877.476.9723.

The post 5 Summer Saving Tips to Sock Away Your Money first appeared on SafeMoney.com.

Because that ship sailed long ago for us, we need to make sure that we are financially prepared for our retirement. $1 million seems to be the magic number that comes up often when we talk about retirement savings. This is based roughly on the idea that you can fund your retirement with a 4% draw, supplement with Social Security, and have enough money for a 30-year retirement with a comfortable, if not extravagant, standard of living.

But with lingering low interest rates, market volatility, and lengthening average lifespans, a 4% withdrawal strategy may not work for many Americans. What to do about it?

How Much Should You Save for Retirement Goals?

So, how much should you be saving? Well, it depends on your current age and when you plan to retire. Your saving habits to date also need to be taken into consideration. However, if you’re in your 50s, and haven’t been saving sufficiently, you will need to make some changes to the way you manage your money to have enough money saved and invested to see you through retirement.

For example, say you are 50 years old, plan to retire at 67, and currently have about $100,000 in retirement savings. You earn around $70,000 a year and are saving your maximum contributions of 8% and expect an annual return of 5% on your investments. You may also receive approximately $1,500 each month from Social Security. Your mortgage is paid off, so you only anticipate needing about 70% of your current earnings to retire with a comfortable lifestyle and be prepared for any unexpected expenses. Based on these assumptions, you expect to need around $4,000 in monthly income (which is approximately 4% of $1 million) but are only going to save enough for $2,300. This means that if you want to meet your goal, you need to save almost 45% of your current salary to have sufficient retirement funds to meet your expected needs.

Don’t panic.

First, you may be over-estimating how much money you will actually need in retirement.
Second, there are a variety of steps you can take to get planning and increase your savings now.
Third, encourage your kids to start saving now, even if it is just $100 a month.

Remember – Focus on Income in Retirement

There is no one-size-fits-all retirement savings framework that applies to everyone. However, how much you need in retirement savings will depend strongly on your income needs in retirement. Those can vary, depending on your expected monthly costs of living, as well as other retirement spending, such on vacations, eating out, indulging in hobbies, or other lifestyle-driven activities. Hence we advocate you focus on creating a long-term retirement snapshot, not aiming for a magic number for retirement income. 

This is What You can Do:

• Check on your savings – How much do you actually have saved? What returns are your investments getting? Talk to a financial advisor to get an accurate picture of where you are and what you will need to retire. While you’re at it, check on the fees that you are paying for your retirement accounts. You might be able to carve more years out of your savings with a more efficient plan.
• Save – Invest, contribute and save as much as you can afford in a variety of saving vehicles. Like the saying goes, don’t put all of your eggs into one basket. Max out your contributions to any 401(k) or other retirement saving programs at work, traditional, and Roth IRAs, and safe investment plans. Investigate annuities and other safe options to preserve your retirement money, especially as you get closer to your target retirement date. If you are over the age of 50, some plans allow you to make catch-up contributions to retirement accounts, the 401(k) limit increases $6,000 to a maximum of $24,000.
• Reduce your spending – It isn’t too hard to trim down on your expenses with small changes to your lifestyle like eating out one less night a week, not buying a new car every few years, canceling that gym membership you never use.

Coping with Life Changes

But life will always get in the way with your best-laid plans. You might have kids heading off to college, or coming home with liberal arts degrees and plans to launch a startup from your basement. You might have an unexpected medical expense. Your children may want to get married and you might want to help pay for it. You might lose your job. Of course, these major life events might prevent you from saving and, in some cases, may cause you to dip into your savings. Very common. Just get back to saving as soon as you can and remember, every little bit adds up.

If you have questions about preparing for retirement – especially as you enter the “retirement red zone,” or the 10 years before retirement and 10 years in your post-work lifespan — SafeMoney.com can help you. You can benefit from the insights and guidance of a knowledgeable financial professional who understands retirement issues, starting with a no-obligation goal-setting consultation.

Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

The post How Much Should I Save Each Month to Save $1 Million for Retirement? first appeared on SafeMoney.com.

According to the Center for Retirement Research at Boston College, the average retirement age has increased slightly over the past ten years. Changes in Social Security incentives, a broad switchover to 401(k) plans, greater quality of life, longer life expectancy, and improved education have been influential in the age increase. As a result, the average retirement age has increased to 64 years for men and 62 years for women.

The definition of retirement has changed, too. Many retirees want to travel or participate in new activities. In turn, these goals – and what it will take to achieve them – have a big impact on retirement planning.

What Factors to Consider?

Retirement planning will vary from person to person. Retirees will have different needs and goals. With that said, there are some primary factors to consider:

• Expenses in retirement
• The age up to which people will plan for
• What lifestyle people will desire in retirement
• Their present health and what it’s likely to be in the future

It’s especially important to consider healthcare costs as part of retirement expenses. Unfortunately, many investors tend to underestimate them. As we’ve discussed before, a healthy couple retiring at age 65 this year may pay almost $395,000 in overall healthcare costs. That includes vision care, dental care, and other costs not covered by Medicare. The research firm HealthView Services estimates healthcare costs have been increasing 5-7% per year.

It’s also important to keep in mind how you’ll be saving up for and meeting expenses in retirement. Most Americans will rely upon four sources of retirement income: Social Security, personal savings, an investment portfolio, and a pension or other retirement vehicle.

How do I Determine How Much for Retirement?

In financial services, one rule of thumb is, in everyday terms, the “85% After-Tax Pre-Retirement Income Replacement Rule.” Over their working lives, many people increase their standard of living. They expect to maintain their lifestyle at least this level in retirement.

Simply put, in retirement most people can expect to spend around 85% of their after-tax work income. Say someone makes $55,000 and is subjected to a 15% tax rate. After tax obligations have been met, take-home pay will be $46,750. In retirement, if that person needed 85% of this after-tax working income, they would need to produce $39,738 in after-tax income per annum.

This rule of thumb may be a starting point. Another point is individualized planning. We tend to think of our financial life in 30-day cycles: monthly income, monthly mortgage payments, monthly household bills, monthly savings goals, and so on. It’s helpful to develop a personalized snapshot of monthly cost projections for your needs in retirement. Break down the projections into different categories. Some questions to consider are:

• Based on the factors you considered earlier and below, what will your spending habits likely be compared to now?
• There are standard monthly costs: food, utility, transportation, housing/rental, monthly debt payment obligations, and others.
• What will be your own monthly costs to cover? Do you currently have any expenses now which you aren’t likely to have in the future?
• Do you have any plans for travel or other plans involving miscellaneous expenses?
• As you age, costs for housing maintenace/repair and healthcare tend to increase. Have you considered these cost factors?

These are a couple ways of gauging how much income you’ll need to “replace” once your working income is unavailable (with your retirement in place). For an age to plan up to: life expectancy is now longer than what it’s been in the past. It may be advisable to plan as if you’re going to live to 100 years old. That will help decrease chances of outliving your retirement income.

Additional Notes

Other things to keep in mind include:

• What are you and your partner’s goals?
• What would you like to be your lifestyle?
• What are your current living expenses?
• What will be your future living expenses (assuming inflation of 3-5%)?
• Do you plan to travel? Engage in any getaways? Partake in new activities?
• Will you be allocating money toward funds for loved ones (like college funds)?
• What are your plans for leaving an estate?
• How will these affect your costs in retirement?
• What looks like it will be your effective tax rate in retirement?
• What is your current health? Your partner’s health?
• Do you have any chronic medical condition?
• Does your partner have a chronic medical condition?
• What will long-term care look like?
• Might there be income needing to be replaced to meet long-term care expenses?

These are just a few questions to ask. Check out our Retirement Planning Basics page for more helpful overview information. When it comes to determining your “number” for retirement, overall it’s helpful to consider your lifestyle expectations, future income, and expectations of future health.

If you’d like advice from a qualified financial professional on a local level, check out our “Find an Advisor” feature. Should you be considering an annuity or other retirement vehicle, check out our free guidebook on retirement planning and annuities for an in-depth, behind-the-scenes look. Don’t hesitate to contact us at 877.GROW.SAFE if you have any questions, too!

The post How Much Should I Save for Retirement? first appeared on SafeMoney.com.