This week I came across a recent survey by Wells Fargo which found (among other things) that when middle class Americans were asked how much savings they would need in order to support themselves in retirement, the median reply was just $300,000. That’s a much lower savings target than you typically hear discussed in financial media. And the press release about the survey sure seemed to indicate that the figure wasn’t high enough.
But just what kind of lifestyle can $300,000 of retirement savings support? I suspect it’s a higher standard of living than much of the financial services industry would have you believe.
What Level of Income Could We Expect?
With $300,000 in savings, if we assume a withdrawal rate of 4% per year, we get just $12,000 of annual spending. Fortunately, personal savings is not the sole source of income for most retirees.
As of 2012, the average monthly Social Security benefit for a retired worker is $1,230. In the case of a married couple, we can add $615 (half of $1,230) to account for a spousal benefit. (Of course, for unmarried people, there would be no second benefit. On the other hand, in a married couple in which both spouses worked, the total benefit would likely be higher.)
When we multiply the sum of those two monthly benefits by 12, we get a total of $22,140 in annual Social Security benefits.
$22,140 of Social Security, plus $12,000 in spending from savings gives us $34,140 of annual income.
And It’s Probably Tax-Free
Unlike the wage income and self-employment income that most people earn throughout their working years, Social Security benefits and investment income are not subject to payroll taxes.
In addition, at that income level, none of the Social Security benefits would be included as taxable income for federal income tax purposes. And the $12,000 of spending from savings — even if we assume it’s coming entirely from tax-deferred accounts — would be free of federal income tax as well because it would not exceed the standard deduction and personal exemptions.
How Far Does $34,000 Go?
Admittedly, given the high price of medical expenses and other day-to-day costs, $34,000 of income for a married couple doesn’t leave a lot of room in the budget for taking the family on cruises around the world — even if the $34,000 is tax-free.
On the other hand, it’s not poverty either, especially when we account for the facts that:
- There’s no need to carve a piece of that income out for retirement savings, and
- Many retirees (roughly 53% of U.S. citizens age 65 or older, as of 2009 ) own their homes and carry no mortgage debt.
There’s Still Cause for Concern
In my opinion, the primary cause for concern here isn’t that the $300,000 goal is too low. The bigger problems are that:
- Many savers won’t meet that goal due to insufficient savings rates, poor investment decisions, and unplanned early retirements, and
- Many retirees — even if they do meet their savings goals — will spend from their savings at too high a rate. (According to the study, when asked what percentage of their savings they expect to withdraw annually in retirement, the median answer was 10%.)