In last week’s blog post, I detailed a hypothetical scenario to determine how much the average American would need to save to support their retirement living expenses. These averages were based upon the Bureau of Labor Statistics’ Consumer Expenditures survey. However, the survey focused on households, which had, on average, 1.7 persons in them. What about single people? How much does the average single American need to save for retirement?
Let’s review similar scenarios to those from last week, but be sure and read until the end to understand why single people need to start planning for retirement earlier.
Assumptions
Of course, it’s important to review our assumptions since that will directly affect the quality of our results. As in my prior blog posts of this type, we’re again taking a simple, back-of-the-envelope approach toward these calculations – what we’re doing here falls woefully short of a full financial plan.
For simplicity, our first assumption is a retirement age of 65. This is the earliest age Medicare is available, so the costs of private health insurance should not apply in this case. It also matches the demographic data found in the BLS study.
We’ll again assume that inflation will be 3% and our expected portfolio returns are 7%, just as in our prior blog posts.
What does the average single American spend in retirement? This is more difficult to answer since we must dive deeper into the data and make more assumptions. According to the BLS survey, Americans aged 65 and up spend, on average, $47,579 per year. However, this is for an average household with 1.7 people in it. How do we adjust accordingly for a household of one?
Since these averages include both couples and single retirees, we can’t simply cut the expenses in half. In addition, while single retirees would certainly expect to pay half the amount of certain expenses like food or personal care, what about housing?
For our examples, I’ve divided all categories of expenses by 1.7, to reflect what one person would spend based upon these numbers. However, I am going to make an adjustment for housing. Housing costs aren’t necessarily consumed on a per-person basis. In fact, a couple could live in the same space as a single person, although I suspect that’s not always the case. As a starting point, we’re going to assume that single retirees spend 80% of what the average household in the study spends on housing.
With all of these adjustments, we arrive at living expenses of $31,680 per year (or $2,640 per month).
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, so we’ll use this in our calculations.
Finally, for portfolio income, we’ll again use the 4% Rule to determine what size portfolio our average single American retiree needs to sustainably support their withdrawals. Again, while the 4% Rule has its critics and limitations, it’s perfect for our back-of-the-envelope calculations.
If Our Single Retiree Is 65 Years Old
Let’s suppose that our retiree is turning 65 this month. Since retirement is happening right now, we do not have to account for future earnings or additional retirement savings.
To find out what our hypothetical single retiree 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 $1,125 per month that must be filled by their investments. That’s $13,500 per year.
Using the 4% Rule, we divide $13,500 by 4% to arrive at a total portfolio need of $337,494. If our retirees have that amount saved, they’re good to go. If not, then they’ll want to consider delaying retirement.
If Our Single Retiree Is 60 Years Old
Instead of age 65, let’s now assume our average single American retiree is 60. That gives them five more years to continue saving. How much ground can they make up in that time?
We’ll make the exact same calculations as we did in the last example but include growth and savings. We’ll need to account for inflation in their living expenses as well.
For retirement in five years, our retiree’s living expenses jump to $3,060 per month, thanks to inflation. Thankfully, Social Security benefits do increase annually with a Cost-of-Living Adjustment (COLA). For simplicity, we will assume Social Security payments increase at the rate of inflation.
That still leaves a shortfall of $1,304 per month that must come from their investments. Using the 4% Rule, we find that our single retiree will now need $391,248 in five years.
Let’s now assume that our single retiree has $225,000 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 $315,574 in five years.
However, that still leaves a difference of $75,674 that our retiree will need to accumulate over the next five years to support the living expenses number that we estimated.
Again, assuming 7% annual returns, they’ll have to save $1,057 per month to hit their goal. That’s over $12,000 per year in savings. This kind of savings number is possible, but not easy.
If Our Single Retiree Is 55 Years Old
Let’s now assume that our single retiree is 55 instead of 60. If all else is equal, how would that affect the result?
Inflation pushes the annual portfolio withdrawals from $1,125 per month today to $1,512 in ten years. That’s quite a jump due to inflation over ten years.
Using the 4% Rule, our single retiree will now need a portfolio of $453,564 at retirement in ten years.
Assuming again that they have $225,000 earning 7%, their investments will grow to $442,609 between now and retirement. However, we still have a difference of $10,955 between what they’ll have and what they’ll need.
To make up for this shortfall, our retiree will now have to put away approximately $63 per month in retirement savings. That’s $759 per year – an amount that’s easily doable.
Because of inflation, the amount a single person needs to save for retirement is greater than most people expect. Inflation is the key driver here. Over the years, our investments will need to work harder for us to fund a successful retirement.
Unfortunately, for the average single American saving for retirement, starting as early as possible becomes very important. Since housing expenses, the biggest line item on almost all Americans’ budgets, is not something that most single retirees can cut in half, single retirees have a greater portfolio need on a per-person basis than do couples.
As the old saying goes, the best time to plant a tree was 20 years ago. The second best time is today.
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.
