This year, retirement savings have taken a setback, as many Americans give precedence to other financial aspects of their lives. In order to relieve the financial burden that the virus has provoked, many Americans have chosen to withdraw from their retirement savings account. On average, Americans withdrew $5,500 in April 2020. Even 401k plan withdrawal rules relaxed, a measure implemented to enable access to alternative cash sources. With savings being directed elsewhere, will 2020 be the year retirement shifts from a right to a privilege?
Retiring Comfortably? A New Concept
In the past, there was a heavy reliance on companies and governments to take care of one’s retirement. Nowadays, the retirement burden falls on the individual. As most people are less prepared for retirement, the notion of long term saving has become more and more distant. In fact, 6 out of 10 Americans are unaware of the amount of savings they require to retire comfortably.
Average Savings Required to Retire Now
In order to retire comfortably at the age of 67 in 2020, the average working American should possess a savings amount of $386,100. This means, from the age of 23, a working adult should be saving $8,775 per year until they reach retirement age (where 67 is the proposed retirement age). To put this into perspective, 75% of a person’s starting salary would be required for each year of retirement.
However, it would be absurd to expect a 23-year-old to save 75% of their estimated starting salary of $31,460 when ‘outside’ costs, such as rent and student loan payments, feature. It would thus be considered reasonable that at the beginning of one’s career, 28% of the starting salary be saved. Make no mistake, for young adults, committing oneself to this savings structure is not an easy task. Saving beyond 25% is onerous. Realistically, the structure would be better applied to someone who had begun saving early and was matched with the 401(k) by their employer.
In an ideal situation, a 30-year-old earning an annual salary of $50,000, should have already saved $25,000. As age increases, it is likely that a professional’s salary will multiply and so should their savings. For example, someone in their 40s should possess a level of savings that is double their income. If you’re in your 50s, your savings should reflect somewhere around four times your annual income.
As of May 2020, the average American household retirement savings for those aged between 20 and 41 years (Millennials) is $23,000, $64,000 for ages 42 to 55 (Generation X), and $144,000 for ages 42 to 74 (Baby Boomers). Yet, one-fourth of American non-retirees indicate not having retirement savings. Almost half of American households aged 55 or older (near retirement age) do not have retirement savings – some had less than $30,000 just saved a few years prior!
Experts have predicted that retirees will not have sufficient funds to sustain their lifestyle come retirement, with many younger generations increasingly finding themselves having to financially support their parents. Many of these parents are of eligible working age, and prior to coronavirus, were in fact employed. However, the pandemic hitting has led job loss among older generations to become more common.
With financial repercussions of the coronavirus pandemic continuing throughout 2020, the value of retirement savings will continue to depreciate, having gone from $18 trillion in 2019 to $14 trillion in 2020. With the crisis at play, American’s will find saving for retirement a long and hard task. Within the first three months of 2020, 401 (k) balances fell 20%, and the average individual retirement account, by 14%. As unemployment rises and companies begin to suspend employee contributions and reduce salaries, many Americans are making premature withdrawals from their retirement savings.
Will I Still Be Able to Retire?
This year has made feeling full financial control challenging; nonetheless, there is still an opportunity to thoughtfully manage your retirement savings. If you’re able, avoid making premature withdrawals from any retirement savings account during this time. Retirement doesn’t have to feel like a privilege, in fact, preparing for retirement is all about consistent and long-term goal-orientated savings.
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Real financial planning should pay off today, and in 10 years time.