Are Americans Saving Enough to Retire?

by Paul R. Ruedi, CFP®

 According to the most recent data from the US Bureau of Economic Analysis, Americans saved just 2.6% of their disposable incomes in the month of April. Is that enough to put them on a path to retirement? I decided to work through an over-simplified example to find out.

Suppose a person with disposable income of $100,000 per year wants to replace 80% of that income in retirement. To do this, they decide to accumulate a $1,000,000 in today’s dollars in an investment portfolio and withdraw 4% per year to provide half of their spending and estimate Social Security will provide the other half. This person has chosen to invest in a 100% stock portfolio at the end of each year that provides an inflation-adjusted return of 7% compounded monthly (approximately the historical average return of the S&P 500 minus 3% to adjust for inflation).

Saving 2.6% of disposable income ($2,600) at the end of each year, it would take a person over 48 years to accumulate $1 million in today’s dollars. Technically someone who started in their early twenties could be on a path to retire in their late 60s or early 70s.

But most Americans do not have 48 years to wait until retirement. If they want to accelerate the process by saving more, a 10% savings rate would shorten the time required to reach $1 million to just over 30 years. Increasing savings to 20% shortens the time required to just under 22 years. Even if they save a whopping 30% of their disposable income, it would still take almost two decades (17.5 years) to reach the goal of accumulating $1,000,000 in today’s dollars.

This brings up a couple lessons. The first is the incredibly important role of compound interest in producing large enough sums to retire. The example shows there is almost no way of getting around the need to be patient for at least a couple decades even at high savings rates. Those who start late have to save so much more to achieve the same retirement goals, that it can become borderline impossible.

The second is that retiring very early requires such an astronomical savings rate, it comes at a material cost to your lifestyle right now. The benefits of saving more must be weighed against what is sacrificed along the way. There is no one-size-fits-all “good” savings rate, but simply what works best for you. If you need help determining what savings rate is the best fit for you, you may want to talk to a financial planner.

Paul R. Ruedi is a Certified Financial Planner™ professional with Ruedi Wealth Management in Champaign, Illinois.