It’s no secret that saving independently is an essential step toward achieving financial security during retirement. But new data reveals that a younger generation of workers may be reducing the amount of retirement savings they need.
at recent days Black stone According to the report, 36% of Gen Zers said they would need a savings balance of less than $250,000 for a comfortable retirement. By contrast, nearly 50% of baby-boomers point to between $1 million and $3 million as the amount needed to maintain a comfortable standard of living once their careers are over.
If you’re in the $250,000 or less camp, you’ll probably be setting yourself up for a world of financial stress when you retire. And the sooner you realize this, the sooner you can make adjustments to your financial plans.
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Why a nest egg worth $250,000 or less won’t cut it
The money you bring with you for retirement is money that will likely last for decades. And so you should be careful not to pull too much money out of an IRA or 401(k) plan at one time.
For years, financial experts have advocated an annual withdrawal rate of 4%. Recently, this rate has been questioned. But even if we use it as a starting point, for a $250,000 nest egg, a 4% draw amounts to $10,000 of annual retirement income. This is definitely not a lot of money.
Of course, there is also Social Security. The average recipient today earns $1,661 per month, which translates to nearly $20,000 per year.
But Social Security benefits could be subject to blanket cuts if lawmakers don’t find a way to pump more money into the program. And while today’s young workers should expect Something From Social Security, it’s hard to say exactly what future benefits will look like.
Even if we’re optimistic and assume lawmakers can avoid the benefit cut, $20,000 in Social Security income plus $10,000 in nest withdrawals doesn’t make the annual retirement pay very generous. So it would be wise for younger workers to aim for higher savings goals – and start making more money at an early age.
The good news is that General Zers has time on their side. Saving $400 a month over 40 years and investing that money at an average annual return of 8% (which is just below the stock market average) results in a $1.24 million nest egg.
When we apply a 4% withdrawal rate to that amount, we get roughly $50,000 in annual income – a huge improvement over $10,000. That’s a more reasonable amount to live with – and it’s not even Social Security.
Of course, today’s young workers may also have a different vision for retirement – one that includes continuing to work in some form to maintain income generation. For those looking to go this route, a savings credit of $250,000 or less may suffice. But the more savings you can make in retirement, the better, so even if working as a senior is part of your plan, it’s still worth increasing your IRA or 401(k) contributions while you can.
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Morey Bachmann holds positions at BlackRock. The Motley Fool does not have a position in any of the stocks mentioned. Motley Fool has a disclosure policy.