Not enough Americans are saving for retirement. What’s new, right?
According to the 2018 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI), only about two-thirds of Americans say they or their spouse have saved anything for retirement, leaving millions of Americans with no retirement savings.
The good news? The number of Americans over age 55 that have nothing saved drops substantially to only about 24%. However, that still leaves far too many people solely reliant on programs like Social Security.
The Average Net Worth of Retirees Gives an Inaccurate Picture
While the average net worth of Americans is only around $70,000, it doesn’t represent an accurate picture for retirees as most people accumulate a higher net worth later in life near retirement age. EBRI estimates that 19% of those age 55 and over have less than $1,000 saved between themselves and their spouse. Furthermore, they state that only 38% of the country age 55 and over have more than $250,000 saved in a household.
Diving a little deeper into retiree net worth, a 2016 survey by the Federal Reserve showed that mean net worth for those age 55 to 64 was roughly $1,167,400. While that sounds encouraging, here’s how it can be deceiving:
- That number includes home equity, and
- While the mean net worth is pretty good, the median net worth is just $187,300 dollars.
How could the median be so low with such a high mean, you ask? It is buoyed significantly by billionaires and the top 1 percent of wealth households.
Furthermore, when you look at data from the last US census back in 2011, you see that a large portion of wealth for retirees is stored in their home. The median wealth for those aged 65 and older was around $284,790. How much of that was home equity? The lion’s share – $192,552 to be exact, leaving less than $100,000 of investments and other savings for the median American couple over age 65.
Applying the 4% Rule
While the 4% safe withdrawal rate is not supposed to be a retirement income plan or strategy, it gives some insight into how much you can safely spend in retirement from a volatile investment portfolio and make your money last for 30 years. The 4% rule states that based on historical US data you can withdraw 4% of the initial value of a 50/50 stock to bond investment portfolio, adjust the withdrawal for inflation, and not run out of money in 30 years.
So, if you want $40,000 a year in retirement from your investments, you need to save roughly $1,000,000 to be on the safe side. However, in many cases, if you are diversified properly and even just get average returns, you can spend more than 5%.
So, what happens when you apply the 4 percent rule to some of those average savings numbers? You get some pretty disappointing results.
For instance, if you only have $100,000 saved at retirement, you can only safely withdraw $4,000 a year adjusted for inflation for 30 years. As such, you likely will have to keep working, rely heavily on Social Security or free up additional equity by downsizing your home.