Comfortable retirement: $1M is cited standard, but some can do with less
A $1 million nest egg might seem out of reach for many cash-strapped Americans, but not everyone needs to hit that highly cited figure to be secure after leaving the working world.
Although more in savings for retirement would always be better, especially as people live longer and health care expenses rise, experts say some retirees can still be comfortable with a lot less.
The keys to preparing for financial security are to come up with a plan, boost your savings rate and avoid some common investing mistakes.
“The way we tell people is, if you think you're going to retire in your early 60s, you should have 10 times your annual earnings,” said Geoff Sanzenbacher, a research economist at Boston College's Center for Retirement Research.
For someone making the median income in the United States of about $52,000, the savings goal drops to slightly more than $500,000, Sanzenbacher said.
“It's really a function of income,” he said. “If you make less, then you need less to accomplish that.”
For those who are willing and able to continue working into their late-60s or 70 before retiring, the multiplier can drop to seven or eight times annual earnings, he said.
“The biggest thing you can do is try to work longer,” he said.
Working longer also can help push out the age when a person needs to begin collecting Social Security, which raises the monthly benefit. If a retiree can wait past the full retirement age of 67, the government increases the monthly benefit by 8 percent for each year until 70. Taking the benefit before 67 lowers the monthly payment. The average beneficiary collects $1,335 a month.
Although $1 million in savings has been touted for years as the minimum for a comfortable retirement, many people won't get there.
About half of households 55 and older have no retirement savings account, such as in a 401(k) defined-contribution plan, but they might have a pension plan, according to a study last year by the Government Accountability Office.
Nearly one-third of those households have no pension or retirement saving account, the study found.
Among those with retirement savings, the median amount is only $104,000, the GAO said.
“We save much less than any other (developed) country,” said Chris McMahon, founder of McMahon Financial in Mt. Lebanon.
With gradual elimination of the workplace pension, McMahon said “people haven't fully digested the fact that the reliance on our own savings is much, much more.”
Sanzenbacher said workers who have a 401(k) plan through a job need to contribute at least enough to maximize their employer's match.
Older workers who need to build their savings quickly can make extra contributions to their 401(k) through what's known as a catch-up provision. The annual contribution is limited to $18,000 for workers up to 50 years old. Workers older than 50 can contribute an additional $6,000 a year.
Workers should resist the temptation to take money out of their 401(k) accounts, which is a major factor in retirees not having enough money saved, Sanzenbacher said.
“People tend to leak out their 401(k)s when they switch jobs,” he said.
A common mistake that can hurt savings is investing in 401(k) funds that have high fees, which reduce annual returns, he said. Look for an index fund that tracks the Standard & Poor's 500 because those typically have the lowest fees.
“You can't control returns but you can control costs,” he said.
Although $1 million might sound like a lot of money and be unattainable for many workers, some retirees may want a lot more, said Chuck Mattiucci, a financial advisor at Fragasso Financial Advisors, Downtown.
Many people work hard for decades and look forward to travel, a vacation home and pursuing expensive hobbies. Mattiucci said workers with those goals need to work with a financial planner to figure out how to make them possible.
In the first two years of retirement, median household spending dropped by 5.5 percent, according to a 2015 report from the Employee Benefit Research Institute in Washington, D.C. But 46 percent of households spend more in the first two years of retirement.
“Somebody who goes into retirement with $1 million who doesn't plan on spending a lot of money and lives a basic lifestyle ... $1 million could be plenty for them,” Mattiucci said.
“It's important for us to talk about what their retirement looks like to them.”
Alex Nixon is a Tribune-Review staff writer. Reach him at 412-320-7928 or email@example.com.