Many Americans believe they’ll need an average of $1.46 million in savings to secure a comfortable retirement, according to a 2024 Northwestern Mutual survey.
But, as of 2022, the average savings balance in retirement accounts was only $609,000 among Americans aged 65 to 74, according to the latest data from the Federal Reserve.
In that same year, however, the median retirement account balance was actually only $200,000.
This tells us that the national average of $609,000 is likely being skewed higher by a small percentage of wealthy people.
Of course, account balances only represent one component of retirement wealth. Many seniors have additional means of income, such as 401(k)s and IRAs. There are also pensions, inheritances, homeownership, and Social Security benefits that all come into the mix.
But have you ever wondered how your level of retirement wealth stacks up? Here are four levels of wealth among older Americans — and how to get into one of the higher ones.
Retirees with a lower level of wealth typically have only modest savings to fall back on and largely live off their Social Security benefits.
People in this boat often have to function in survival mode. They may have just enough money to cover the absolute essentials, with limited flexibility for discretionary spending. In many cases, they may be living paycheck to paycheck.
Unexpected bills — for sudden home repairs or emergency medical procedures — can be stressful, and savings may be depleted after one or two of these unforeseen expenses.
The Social Security Administration (SSA) states that monthly benefits generally replace around 40% of retiree’s annual pre-retirement earnings — and notes that it shouldn’t be the only source of income.
A pay cut that large could lead to a bare bones retirement, and one that requires a significant cutback on spending.
If you fall into this category, you may have less than the median $200,000 savings balance among older Americans.
Those that fall under this category likely have some financial stress, but who doesn’t?
Retirees in this situation may have enough money to cover their basic needs and still have a modest amount left over for discretionary spending.
At the same time, middle-wealth retirees may only be replacing about 60% to 70% of their pre-retirement income between their savings, Social Security, and other sources.
If that’s your situation, you may not be struggling day-to-day — but you’re also likely not living it up. You may have to spend carefully, adhere to a strict budget, and plan ahead for extra costs, such as the occasional vacation or home repair.
If you’re in this category, your retirement savings may be in line with the $609,000 national average, as per the Fed data.
Read more: These 5 magic money moves will boost you up America’s net worth ladder in 2024 — and you can complete each step within minutes. [https://moneywise.com/managing-money/how-to-earn-money/money-moves-to-make-right-now?throw=C2HALF_streamline)
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This group is generally in good shape. Retirees in this boat can replace around 70% to 80% of their pre-retirement income, without any financial stress or uncertainty.
At this level, it may not be necessary to cut back on expenses, because many workers save 15% to 20% of their income for retirement to begin with. So, if you’re no longer saving for retirement, you can live quite comfortably on 80% of what you used to earn in the workforce.
If you’re in this category, you may not be paying $20,000 a year for a country club membership or traveling abroad every month, but it’s possible to take a few nice trips and still have money left over for other hobbies and experiences.
Chances are, you have a larger retirement account balance than the $609,000 national average.
Retirees in the category are in a fantastic position. Not only are they able to maintain their pre-retirement lifestyles, but perhaps even upgrade it.
If you’re in this category, you have more than the average $609,000 retirement account balance. Not only that, but you may also find that your savings are increasing as retirement rolls along.
Once you reach a certain level of wealth, even modest investment gains can make it so your retirement account’s growth outpaces your withdrawals.
If you have $4 million saved, for example, with a portfolio that generates a yearly 5% return, you’re earning an additional $200,000 a year.
If you’re able to live well off of $160,000 in retirement plan withdrawals per year, your savings will only continue to grow.
Once you’ve retired, it can be difficult to move from one level of wealth to another. So your best bet is to take steps to move into a higher tier ahead of retirement — and there are a few ways you can do this.
If feasible, consider saving more money each month and claiming your full 401(k) match.
Make sure you’re investing wisely, taking into consideration your age and economic situation. Start a health savings account (HSA) if you haven’t already. Here, you can set aside pre-tax dollars for qualified medical expenses and ultimately lower your out-of-pocket expenses.
A report from Fidelity estimates that a 65-year-old entering retirement can expect to spend a hefty $165,000 on healthcare in their golden years, so that HSA will come in handy.
Be mindful of your spending habits so that you can free up more money for your IRA or 401(k). Keeping your debts as low (or non-existent) as possible will free up more cash.
Delay dipping into your Social Security until you’re past full retirement age so you can grow your benefits by 8% annually until age 70.
You can also set yourself up with tax-friendly passive income, such as municipal bonds, where you can collect interest payments that give you more spending power in your golden years. They can be an excellent investment because their interest is, generally, federally tax-exempt.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
