Saving for retirement can feel like a daunting task, especially when you are young, and retirement feels extremely far away. One of the most important aspects of planning for retirement is accurately predicting how much you’ll even need to save in the first place. After all, having a clear goal to work toward will help to inform what you are doing on an annual, monthly, or even weekly basis. Unsurprisingly, accurately predicting future retirement needs is something that many people struggle with, and findings have shown that millennials in particular are drastically underestimating this. Continue reading to learn more about these findings.
DIFFERING IDEAS OF RETIREMENT NEEDS
The Transamerica Center for Retirement Studies conducted a survey to gain greater insight on how people are thinking about retirement. One part of the study targeted differences in how people thought about saving to meet their retirement needs. It turns out that there are pretty significant generational differences in projected retirement income needs.
The highest median estimate (and closest to reality, though still undershooting it) was among Boomers, who estimated they need $750,000 to retire. This makes sense given that their generation is at or near retirement, so they have a relatively better idea of their retirement needs. Gen X and Gen Z individuals estimated $500,000, while Millennials estimated $300,000. Thus, the generational differences are clear, with Millennials’ predictions being concerningly low.
TRUE RETIREMENT NEEDS
There is no clear answer as to exactly how much people should save for retirement given that everyone lives their lives differently and has differing needs (with differing costs), but there are general rules of thumb. The key one to remember is that you should generally try have an annual retirement income that is ¾ of your annual pre-retirement income. How much this ultimately comes out to in terms of what you need to save will depend on things like your pre-retirement income, when you plan to retire, and so on. But on the whole, it is likely that you may be underestimating your retirement needs.
CALCULATING BEATS GUESSING
As you can see, the rule of thumb described above is a true calculation of the funds you will need for retirement. In reality, however, many people make the mistake of simply guessing how much they will need for retirement. In the Transamerica survey, over 40% of respondents said that they came to their answer simply by guessing. Given the importance of retirement, it is critical that you take a calculated approach to guide your saving.
YOUNGER PEOPLE ARE STARTING TO SAVE MORE
The good news here is that while many people are underestimating what they need to save for retirement, the younger generations are starting to think about savings much more. Among Gen Z individuals, roughly 70% have already begun saving for retirement, which is setting them up well for the future. The median age at which this generation has begun to save is 19, which leaves them with decades of time to continue to accumulate savings for their future retirement. This is a very promising sign!