Younger Workers May Be Sorely Underestimating Their Retirement-Savings Needs

If there were a single savings target that could guarantee financial security during retirement, we'd all know exactly how much to save. But that magic number just doesn't exist. In fact, you can plan and plan for retirement, but once you're there, you may find that your expenses come in higher than expected, whether due to home maintenance issues, health problems, or other factors you couldn't have predicted ahead of time. As such, the best most of us can do is save consistently for retirement and try to amass a reasonable amount of wealth.

But younger workers may be setting the bar too low in this regard. Millennials think they'll need $300,000 in savings to retire securely, according to a recent Transamerica survey -- meaning, that's the median amount younger workers feel they should accrue before leaving the workforce. And while it's certainly not a small sum, it also may not be enough to provide for the comfortable retirement today's workers are apt to want.

How far will $300,000 in retirement savings go?

The typical senior spends about $46,000 a year in retirement, according to the U.S. Bureau of Labor Statistics. Now that's just an average, which means that if you're willing to live a more frugal lifestyle, you might spend less.

Younger Workers May Be Sorely Underestimating Their Retirement-Savings Needs
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But here's how a $300,000 savings balance stacks up against that figure. If we use the 4% rule to determine our withdrawal rate, that leaves us with $12,000 in annual income from savings. Clearly, that alone won't cut it, but let's not forget about Social Security. The average senior today collects about $1,500 a month, or $18,000 a year, so when we add that to the $12,000 we get from savings, our total comes to around $30,000 in annual income.

Living on that income may be doable for some seniors -- but is it doable for you? If your goal is to travel a lot in retirement, enjoy local nightlife, and have money to spend on different hobbies, then you may find that $30,000 a year just doesn't cut it. In fact, in some parts of the country, that won't even be enough to cover essential expenses like food, housing, and healthcare.

Therefore, if you're hoping to really have enough money to enjoy your senior years, you'll probably need to do better than $300,000 in total. The good news, however, is that if you're on the younger side, you have plenty of opportunity to build up wealth over time.

Imagine you're 30 years old with a mere $5,000 socked away for retirement. If you were to save $300 a month between now and age 67, you'd wind up with about $638,000, assuming the investments in your retirement plan generate an average annual 7% return -- which is actually a few percentage points below the stock market's long-term average. That's more than double the $300,000 today's younger workers assume will suffice, and it also means that based on a 4% withdrawal rate, you'd be looking at about $25,500 in annual income from savings alone. Throw in $18,000 a year from Social Security, and you're at $43,500, which is largely in line with what the typical senior spends annually today.

When it comes to retirement savings, everyone has different abilities and needs. But if you want to really enjoy your senior years, you may want to aim a lot higher than a $300,000 nest egg. And if you're fairly young, you have plenty of time to grow that wealth -- you just need to commit to that goal and stick with it.