Instead of How Much to Save for Retirement, Ask This

So, how much money do you need to save to enjoy a long and stress-free retirement? That’s a million-dollar question, or at least it might have been in 2006.

In 2022, it could be a three, four, or even a five-million-dollar question. But why is that? And, is “how much” you save for retirement even the right question to ask?

We’re going to briefly ponder both of those questions in this article.

Let’s get started…

Why $1 million can evaporate like water on a hot stove

At a staggering 7.5%, overall CPI is still accelerating at almost double the pace than it was only one year ago. That means if your retirement savings aren’t performing at that rate right now, they could continue to suffer until inflation or your rate-of-return changes.

A USA Today article made the potential suffering clear in the headline by answering “Is $1 million enough to retire on?” by stating: “Probably not.”

The same piece continued by explaining three reasons that $1 million saved for retirement might not last as long you need it to, so you can enjoy your “golden years”:

How much you’re spending (and paying) each year in retirement matters. In 2020, the average household headed by an adult 65 or older spends about $47,579 per year, according to the U.S. Bureau of Labor Statistics. But what you could plan on spending versus what you’re paying must account for inflation. That means even if it appears that $1 million could last for 20 years at first glance, those hard-earned dollars disappear much faster thanks to increasing prices.

2. Social Security isn’t likely to help as much as you think. According to the latest official data, the average monthly benefit for “all retired workers” is $1,657 ($19,884 annually), including the latest cost-of-living-adjustment (COLA). Of course that is helpful, but it won’t help a $1 million portfolio last much longer.

3. Unexpected expenses can take a big bite out of any retirement plan. Just one medical emergency could take a big bite out of your annual spending budget. Medical inflation makes that potential problem even worse. That doesn’t even factor in household or automotive emergency repairs.

If after reading the above three points, having $1 million saved for retirement seems more like change rattling around in a piggy bank, you’re not alone.

But there is a different way to think about your retirement savings.

Pick a “dynamic savings number” (plus one more idea)

It’s tempting to think that you could plan for retirement, then “set it and forget it.” But according to Forbes’s David Kudla, you might consider a different approach:

It’s important to remember that retirement-income planning isn’t a “set it and forget it” exercise. Rather, your retirement plan should be a working document that is reevaluated at least annually to account for any changes to inflation, investment returns, life expectancy, spending, and taxes.

Wealth advisor Rob Clarefeld thinks retirement planning is more than just some “magic number”:

…though there are many rules of thumb and even online resources and tools to calculate what’s considered the holy grail of planning — the magic number — I believe that providing one number for retirement is too simplistic. It can also be counterproductive and even psychologically and financially damaging if that number is incorrect — as it often is.

Combining the two pieces of advice from both experts seems to highlight the possibility of thinking about “how much to save for retirement” more dynamically.

That could mean factoring in the variables Kudla pointed out, and not limiting your planning to some static “magic number,” like Clarefeld mentioned.

Another idea to consider is putting your hard-earned dollars into assets that resist inflation and preserve purchasing power.

How inflation-resistant investments can help

There are several types of assets that can “grow with inflation” to protect the purchasing power of your dollars. This could help bolster your retirement nest egg, no matter what number of dollars you save. From Treasury inflation-protected securities (TIPS), to Series I savings bonds, and even physical gold and silver, there are a number of ways to protect your retirement savings. We’ve assessed the strengths and weaknesses of inflation-resistant investments, comparing the benefits and drawbacks of asset classes that can help your savings last longer.

Consider learning how gold performs over time and the benefits of a well-diversified savings plan. These steps can help you create a plan to secure a stress-free retirement.

2022, Featured, inflation, retirement plan, retirement savings