How Much Does the Average American Need to Save for Retirement?


In a prior blog post, I detailed a hypothetical scenario to determine how much someone would need to save to support $10,000 per month in retirement living expenses. However, this kind of income level may only be needed for high-net-worth people. What about the rest of the country? How much does the average American need to save for retirement?

We’re going to run through a few scenarios, but be sure and read until the end for some good news found in the study.


Of course, in any hypothetical situation, the quality of the results depends upon our inputs. Garbage in, garbage out. For this example, we’re again taking a simple, back-of-the-envelope approach.

For simplicity, our first assumption is a retirement age of 65. This is the earliest age that any of us can apply for Medicare benefits, so the costs of private health insurance will not apply here. It also aligns nicely with the demographic data we found published by the Bureau of Labor Statistics.

We’ll also assume that inflation will be 3% and our expected portfolio returns are 7%, just as in our prior example. You may or may not agree with those assumptions, given current market valuations and inflation data.

What does the average American spend in retirement? According to the Bureau of Labor Statistics Consumer Expenditures survey, Americans aged 65 and up spend, on average, $47,579 per year. That’s $3,965 per month. As we saw in last week’s blog post, spending does decline over retirement, so early retirees would spend more than this amount and older retirees would spend less.

Next, we need to make some assumptions about Social Security. According to the Social Security Administration, the average retirement benefit as of September 2021 is $1,515. Going back to the BLS survey data, the average household of someone who is 65 or older has 1.7 persons in it. Therefore, we will assume that one spouse is receiving $1,515 per month and the other is receiving 70% of that amount: $1,061.

Finally, for portfolio income, we’ll again use the 4% Rule to determine what size portfolio our average American retirees need to sustainably support their withdrawals. While the 4% Rule has its critics and limitations, it’s perfect for our back-of-the-envelope calculations.

If Our Retirees Are 65 Years Old

Let’s suppose that our retirees are turning 65 this month. Since retirement is happening now, there’s no future growth or portfolio additions to factor in. It becomes a simpler calculation and a great starting benchmark.

To find out what our hypothetical couple would need to withdraw from their portfolio, we’ll first subtract their Social Security benefits from their total living expenses. This leaves us with a shortfall of $1,389 per month that must be filled by their investments. That’s $16,673 per year.

Using the 4% Rule, we divide $16,673 by 4% to arrive at a total portfolio need of $416,825. If our retirees in this case have that amount saved, they’re good-to-go. If not, then they’ll want to consider delaying retirement.

If Our Retirees Are 60 Years Old

Instead of age 65, let’s now assume our all-American, soon-to-be retirees are 60. That still gives their investments time to grow. It also gives them more time to continue socking away retirement funds. How much ground can they make up in five years?

We’ll make the exact same calculations as we did in the last example, but we’ll want to factor in growth and savings. Let’s also not forget the effects of inflation on their living expenses.

For retirement in five years, our retirees’ living expenses jump to $4,596 per month, thanks to inflation. Thankfully, Social Security benefits do increase annually with a Cost-of-Living Adjustment (COLA). For simplicity, we will assume that their Social Security payments increase at the rate of inflation as well.

That still leaves a shortfall of $1,611 per month that must come from their investments. Using the 4% Rule, we find that our couple will now need $483,214 in five years.

How Much Does the Average American Need to Save for Retirement?

Let’s now assume that our couple has $275,000 saved for retirement. They’ve done a good job so far to get to this point. Assuming they see 7% annual growth on their investments, they can expect their retirement portfolio will grow to $385,702 in five years.

However, that still leaves a difference of $97,513 that our couple will need to accumulate over the next five years to support the average American’s retirement living expenses.

Again, assuming 7% annual returns, they’ll have to save $1,362 per month to hit their goal. That’s over $16,000 per year in savings. This kind of savings number is possible, but not easy.

If Our Retirees Are 55 Years Old

Let’s now assume that our couple is 55 instead of 60. If all else is equal, how would that affect the result?

Inflation pushes the annual portfolio withdrawals from $1,389 per month today to $1,867 in ten years. That 3% compounds quickly, doesn’t it?

Using the 4% Rule, our couple will now need a portfolio of $560,178 at retirement in ten years.

Assuming again that they have $275,000 earning 7%, their investments will grow to $540,967 between now and retirement. However, we still have a difference of $19,211 between what they’ll have and what they’ll need.

To make up for this shortfall, our couple will now have to put away approximately $111 per month in retirement savings. That’s $1,332 per year – an amount that’s certainly doable.

How Much Do You Need to Save?

Of course, the numbers here are simply averages from a limited data set. We could also add more nuance to our assumptions for investment returns, inflation, and a sustainable withdrawal rate.

Because of inflation, the amount needed for retirement is greater than most people expect. This is the reason inflation is a hot topic right now. Over the years, our investments will need to work hard on our behalf to fund a successful retirement.

Fortunately, there is good news in some of this data. According to the Bureau of Labor Statistics, households in the survey had an average after-tax income of $50,133 per year. So, on average, consumers are making this work. There’s a good chance that many of them have a pension or other income that helps bridge the gap.

Of course, no one is average. If you need help figuring out how much you’ll need to save for retirement, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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