By the time you reach age 55, you likely have 15 years or less to go before you retire. That's why it's so troubling that the Federal Reserve's 2016 Survey of Consumer Finances found that workers between the ages of 55 and 64 had an average retirement savings balance of just $135,000, which is not nearly enough to provide the income retirees need to live in comfort and financial security.
If you're 55 or older and your retirement savings are around that amount, or even lower, then you need to take action -- fast.
Why that's not enough money
While $135,000 may sound like a lot of money, your retirement savings will need to be your primary source of income for decades. To avoid exhausting your savings, you must limit yourself to withdrawing a small percentage of your balance each year.
Let's say you follow the 4% rule, withdrawing 4% of your savings in your first year of retirement and adjusting that amount for inflation each year afterward. A retirement account containing $135,000 would provide you with an income of $5,400 in the first year, or $450 per month. That's an awfully small income to live on, even with Social Security benefits to help.
To make matters worse, that's an optimistic scenario: While the 4% rule was once accepted as the best guideline for planning your retirement distributions, it has recently come under fire as potentially being too aggressive. That means you may be limited to no more than 3% to 3.5% of your retirement savings for income each year, at least during your first few years of retirement.
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How much retirement savings do you need?
There are countless retirement calculators floating around the internet that can help you pin down a retirement savings goal. The problem is that they produce widely varying results, making it tough to figure out which one has the "right" answer.
The amount you'll need to save up depends on how high your retirement expenses will be. Your savings will need to provide enough income to cover all your expenses, as well as potential emergencies and the occasional splurge. To accurately estimate your retirement expenses, you'll need to not only add up all your expected bills, but also account for how you plan to spend your time. After all, you'll have a lot of time on your hands, so how you choose to spend it will have a major impact on your finances. As a soon-to-be senior citizen, you'll also need to plan for expenses like rising medical bills and long-term care services.
When calculating retirement expenses, you can use your current expenses as a guideline and then make any necessary adjustments. For example, you may find that you can cut your transportation costs in half, since you won't be commuting to work -- but you may also need to double your travel budget. It's a good idea to build at least a 10% margin of error into your expense calculations for emergencies and other unexpected expenses. For example, if you do the math and decide that your retirement expenses will be $3,000 per month, aim for a retirement income of at least $3,300 per month to allow room for error.