It may seem as having $1 million at retirement would be more than enough to live comfortably. Based on the yearly median household income of $56,320, in order to equal that amount during retirement, retirees need an average monthly income from Social Security of $1360 combined with the $40,000 income generated by the $1 million nest egg. This will allow a retiree the ability to continue living a middle-class lifestyle.
However, the current typical net worth for a potential retiree is around $174,000, not $1 million, there are not a vast number of households living in poverty. This is due, in part, to retirees who are able to keep their spending below that of the working class without having to sacrifice their current lifestyle.
Since Social Security taxes are taken from employment income, those who are retired and receiving a pension or withdrawals from a retirement account such as a 401(k), are not subject to Social Security taxes.
In addition, if a mortgage is paid off at retirement age, a substantial portion of housing expenses are eliminated. Children who are grown and working do not need additional support from parents. Working expenses, such as clothing, transportation, and other work related expenses are now eliminated.
With an increase in free time, tasks that were hired out while working are no longer needed. Lawn maintenance, cooking, cleaning, and minor household repairs are just a few of the tasks that a retiree is able to now tackle with their new found free time.
All of these areas lead to a total lower net cost overall for retirees. The one area that seems to be larger when compared to the younger working group is health care expenses. However, overall the amount of income compared to the amount of expenses is lower the older a person gets.
When comparing age groups in ten year splits, the breakdown is as follows:
- Under age 25 – income is less than expenses by almost $3,000 yearly
- Age 25-34 – income is significantly higher than expenses by over $10,000
- Age 35-44 – income continues to remain higher than expenses by almost $20,000
- Age 45-54 – income remains higher, but the difference begins to fall to $18,000
- Age 55-64 – the difference between income and expenses remains similar to the 45-54 age group
- Age 65-74 – as income drops significantly, so does the gap between income and expenses to less than $7,000
- Age 75 and older – at this age bracket, income drops to less than expenses by a few hundred dollars, yearly
As costs drop, the need for that $1 million nest egg doesn’t seem so necessary. The typical yearly spending amount for a typical retired household is less than $47,000 per year. Therefore, that initial $56,320 median income need drops by almost $10,000. With Social Security benefits totaling $2,260 for a married couple, only $20,000 is then needed from the retirement fund nest egg. Based on the well-known retirement rule-of-thumb called the 4 percent rule, spending at this level would only require a $500,000 portfolio.
Remaining Comfortable on Less
For many, even cutting the $1 million in half is still not a reachable goal. However, this doesn’t have to equate to a bleak retirement. There are certain strategies that a person can take to still retire on a much smaller amount. For example:
- Working a retirement job – A retirement job can help to cover a part of monthly costs and keep a retiree active.
- Helping with grandchildren – By living with a child, the housing costs can be cut for not only the retiree but the working adult child as well. A huge expense for young parents is childcare costs. This expense can be lowered drastically by a live-in grandparent.
- Continue to work – The longer a person waits to retire, the shorter amount of time is needed to draw from the retirement account. If a person waits until age 70 to retire, their Social Security benefits will be higher. Since Social Security is based on the highest 35 years of wages, working longer than 35 years can benefit a retiree.
The last point is extremely important for retirees to consider. With the accumulated credits, Social Security can be claimed after age 62. With full retirement age at 66 for people born before 1960, and 67 for those born after 1960, it is monetarily beneficial for those approaching retirement age to work as long as possible. In fact, the amount of Social Security received by retiring at age 62 versus retiring eight years later at age 70 is, on average, a difference of $570 per month, not to mention the additional money that is added to any retirement account.
A Happy Retirement
No matter what your retirement goals may be, planning ahead for a happy retirement is needed. Find out where you are financially today, where you want to be financially at retirement, and what steps you need to get there. Then, act on your plan and begin your journey to your happy retirement years.
Although a nice thought to have, building a million-dollar nest egg should not create a life full of denial and self-sacrifice. With a bit of creative planning, many people can achieve a full and successful retirement with less money. Plan your retirement, know what your goals are and how to achieve them. This will ensure that you can continue to live on into your golden years with a comfortable lifestyle.