Millennials may need to ramp up their savings quickly, as some new estimates have earmarked $2 million as the new amount needed when they retire.
While this amount may seem too high of an estimate, surpassing the common goal of $1 million, many financial advisors said this updated amount is not unrealistic as people are living longer and the responsibility of saving for retirement through 401(k) plans and IRAs lies solely with consumers.
Accumulating $2 million for retirement is a “good goal for people to strive for and can be achieved by saving $20,000 a year for 30 years and praying for a 6% average market return,” said Patrick Morris, CEO of New York-based HAGIN Investment Management.
At first blush, $2 million seems like a lofty goal that is unattainable, but starting your retirement savings in your 20s and taking advantage of compound interest early on makes that figure more realistic.
“Of course, the problem is that the $20,000 is not an easy number to come by,” said Morris. “The miraculous power of compounding only works if you have the ability to fund all of it along the way and the market returns hold up. The take away is that the number is probably pretty accurate.”
Reaching the Target Amount
A good rule of thumb for retirement planning is to earmark 10% to 15% of your gross income each year for retirement, said Jon Ulin, a managing principal of Ulin & Co. Wealth Management in Boca Raton, Fla. A Millennial making $50,000 a year without big career changes and large raises should estimate savings 40 times his current salary to achieve $2 million, he said.
People need more money in retirement than they initially believe. Many clients are spending a minimum of $3,000 a month once they stop working on basic necessities such as property tax, car payments and federal taxes, Ulin said.
One way to budget how much you will spend each year is expect to use 3% to 4% of your savings in retirement, he added.
“Every $1 million in savings can provide you approximately $30,000 to $40,000 each year in portfolio income from a diversified portfolio,” Ulin said.
The debate on whether Social Security will still have funds for Millennials remains active. Adding Social Security benefits will bring consumers closer to obtaining 70% to 80% of their future household income to use in retirement.
“If you think that your Social Security benefits may be greatly cut down 35 years from now, you may still want to add in at least 50% of your proposed future benefit or $37,000 a year,” he said.
A 30-year-old employee earning $50,000 a year today would receive an estimated $20,000 a year from Social Security at age 65 in today’s dollars, but $74,000 a year in inflated dollars.
“This is a good starting point to target if you do not plan to receive a pension in retirement or hit the lottery,” Ulin said.
Why Starting Now Nets More Money
The most valuable asset that Millennials and Gen X-ers possess is time because many people who are retired waited too long to start saving.
“One of the many mistakes made by Baby Boomers is that they started saving too late,” said Don Shelly, a professor of practice in finance at Southern Methodist University’s Cox School of Business in Dallas. “If more Baby Boomers started saving in their 30s, they would have benefited tremendously from the extra ten years of compounding.”
The balance of someone who saves 30 years for retirement compared to only 20 years nets increases by 150%, he said.