How Much Does a Middle-Class American Need to Save for Retirement?

let me tell you a story about two middle class americans planning for retirement let's call them median mark and upper middle matt each is 55 years old and wants to retire in 10 years so what's the biggest difference between them well median mark earns the median income for his age group seventy four thousand two hundred and seventy dollars a year upper middle mat however earns twice as much now does that mean that upper middle matt will be able to retire first stick around to find out the answer will surprise you a few months ago i made a video that detailed how much you'd need to save to support ten thousand dollars per month in retirement living expenses while it was one of my more popular videos many of you let me know that ten thousand dollars per month was way too much instead i needed to focus on what the average american would spend in retirement so what kind of retirement spending would accurately reflect the average middle class american again i dug into the numbers i found plenty of interesting data including one item that should concern us all but there's also good news be sure to watch until the very end where i discuss the implications of what i found according to the pew research center middle class households earn between thirds and two times the u.s median household income according to the 2020 census data the median household income for those between ages 55 and 64 is 74 270 per year that gives us a middle class income range between approximately forty nine thousand five hundred dollars and one hundred and forty eight thousand five hundred dollars for this age group since the lower end of this range was covered in a prior video let's focus on two retirees today median mark who earns the median income of seventy four thousand two hundred and seventy dollars per year and upper middlemat who earns twice that amount and represents the top end of the middle class for simplicity and consistency we'll use the same assumptions we've made in prior videos in all of our calculations inflation will be 3 percent and our expected portfolio returns are seven percent although i'm sure i'll hear from a few of you about those assumptions in the comments below for social security we'll simply input mark's and matt's income into the online quick calculator to arrive at a monthly benefit we'll also assume that they have stay-at-home spouses that will be eligible for spousal benefits as for retirement portfolio income we'll again use the four percent rule a tricky thing about using census numbers is that they list income not spending some of what mark and matt earn will be reduced by their savings and taxes so we'll need to adjust for each of our middle class retirees we will assume that they save five percent of their gross income into a tax deferred retirement account and 10 percent into an after-tax savings account after we calculate and pay taxes we'll assume that they spend what's left that leaves four thousand eight hundred and thirty four dollars per month in spending for median mark and nine thousand one hundred three dollars in monthly expenses for upper middle mat interestingly upper middle mat is creeping awfully close to the 10 000 per month mark to determine what mark and matt will need to save each month for retirement we'll need to understand where they're starting according to the data the median savings for someone in the 55 to 64 age group looks something like this cash accounts of seventy three hundred dollars stocks and mutual funds of six thousand dollars retirement accounts of one hundred and thirty thousand dollars bringing us to a total investment amount of one hundred and forty three thousand three hundred dollars so we'll assume that's what median mark has saved for upper middle matt we'll assume he's saved twice that amount if mark and matt plan to retire in 10 years how much will they need to have saved between now and then for media and mark his monthly living expenses jump to 6496 dollars per month at retirement thanks to inflation thankfully social security benefits do increase annually with the cost of living adjustment for simplicity we will assume that social security payments increase at the rate of inflation as well that still leaves a shortfall of two thousand five hundred eighty eight dollars per month that mark's investments will need to provide him using the four percent rule we find that mark will need around seven hundred and seventy six thousand dollars for retirement in ten years for upper middle matt the math is similar his nine thousand one hundred three dollars per month in spending jumps to twelve thousand two hundred thirty four in ten years thanks to inflation at retirement matt's investments will need to provide him sixty seven hundred dollars per month using the four percent rule we find that upper middle mat will need a retirement portfolio of approximately two million dollars in ten years by the way if you want to run these calculations for your personal situation i've created a downloadable spreadsheet that you can find at pranawealth.com resources it even works if you have a pension or other retirement income other than social security now that we know how much they need how can mark and matt get there and who will get there first based upon the census data we know that median mark has around 143 000 saved assuming he earns an average of seven percent on his investments mark will need to start saving a whopping two thousand eight hundred and fifty six dollars per month to meet his retirement spending goal think about that mark will need to save almost 35 000 per year that's close to half of his take-home pay unfortunately things aren't much rosier for upper middleman despite earning twice as much and saving twice as much as median mark upper middle mat will need to save 8 356 dollars per month to meet his retirement spending goals that's over a hundred thousand dollars per year around three quarters of his take-home pay as we can clearly see both future retirees are so far behind in their retirement savings that it would be nearly impossible to catch up if you thought that either one of them was going to be able to make it to retirement at 65 you were wrong i told you that the answer might surprise you digging into the census data and the bureau of labor statistics data that i've used in prior videos it's easy to see that people are doing their best to save they do tend to be cash flow positive however the amount they're saving isn't enough to support the same levels of spending that they enjoy before retiring if upper middle matt chooses to live the same lifestyle as media mark he will eventually have plenty of money to fund the retirement that he wants of course the flip side for him is to be forced into a more austere retirement simply because the resources aren't there to support anything more now for the good news after looking at plenty of data there's strong evidence that the 80 replacement rule is a real thing so how would this impact median mark and upper middle mat let's take a look if their retirement expenses were 80 percent of their pre-retirement expenses median mark would now need to have around 386 000 saved at retirement for upper middle matt his portfolio need would drop to 1.28 million from there median mark would need to save 604 dollars per month until retirement well below his current savings rate for upper middlemat it's not as easy he'll need to save four thousand one hundred fifteen dollars per month to retire spending eighty percent of what he does now to make things work he'll need to start reducing his living expenses now and start saving more but it can be done in going through these scenarios and reviewing the data i wonder if these low average american retirement spending levels are constrained by a lack of resources the census data clearly shows us that the median american has not saved nearly enough to support their current living expenses in retirement if you want the details of what retirement looks like for an average american household i recommend you watch this video to see how it compares with median mark and middle class matt thanks for watching and i'll see you in the next video

Channel: Prana Wealth

Views: 435,031

Keywords: financial advisor in atlanta, financial planner in atlanta, fee only financial advisor, fee only financial planner, Patrick King, Prana Wealth, retirement planning, financial planning, retirement, financial advisor, financial planner, how to retire, middle-class retirement, how much to save for a middle-class retirement, how much does a middle-class American need to save for retirement, upper-middle-class retirement, how much to save for an upper-middle class retirement

Id: dl_wmLbJG0w

Length: 9min 3sec (543 seconds)

Published: Thu Dec 23 2021