Most Americans are optimistic about their financial future, but is it enough? – The crazy fool

Money is a sensitive topic for many people, causing even stress and anxiety in some people. Americans worry more about their finances than any other problem, including relationships and work, according to a survey by Northwestern Mutual. Overall, nine in ten say they are never happier than when their finances are in order.

The good news is that many people are happy with their financial situation. According to a Gallup poll, more than half (56%) of Americans say their finances are in very good or excellent health: an increase of 10 percentage points since 2015 and the highest level of satisfaction since 2002.

The survey also revealed that 42% of Americans do not worry too much about the amount they save for retirement. While this may seem like good news on the surface, it may not be as positive as it seems.

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Should workers be worried about retirement?

Retirement planning can be a delicate subject. It's hard to say if you are saving enough for the future because retirement will be decades away. Even if you pay a portion of each paycheck into your pension fund, this does not guarantee that you will have saved enough to take a comfortable retirement.

Even though it seems like you're saving a lot of money, it's easy to underestimate the cost of retirement. The median amount that Boomers saved for retirement is $ 152,000, according to the Transamerica Center for Retirement Studies. That sounds like a lot of the change, but if you withdraw $ 35,000 a year in retirement, that money will not last more than four years.

In addition, those who actually have a retirement savings are ahead of many others. According to the Insured Insured Institute, about 42% of baby boomers have not spared anything for their retirement.

One reason why workers are so confident in the idea of ​​retiring, even if they do not have hundreds of thousands of dollars, could be explained by the fact that they They expect Social Security benefits to cover most of their retirement expenses. According to the Nationwide Retirement Institute, 42% of future retirees expect their benefits to be their main source of income, and 26% of them think they can retire comfortably with social security alone.

But when the average social security check only costs $ 1,400 a month, it can be difficult to stretch that money to cover all your expenses. Especially when benefits may need to be phased out over the next few decades, it may not be best to put all your eggs in the Social Security basket.

How to make sure you are well enough prepared for retirement

Ideally, you should not rely on Social Security to cover all your retirement expenses. It is therefore important to have a solid pension fund. But how much should you save?

The answer depends on a variety of factors, the most important being the amount you plan to spend in retirement. Your retirement expenses may be higher or lower than they are now, depending on the type of lifestyle you expect when you retire. Once you have an idea of ​​how much you plan to spend each year, multiply that number by 25 to determine the approximate figure of what you should have saved when you retired.

The rule of 25 is based on the 4% rule, which states that you can withdraw 4% of your total savings during the first year of your retirement, and then adjust your withdrawals each year thereafter to reflect the amount of your savings. inflation. To work backwards by calculating how much you need to save based on the age of retirement, multiply the amount you want to withdraw each year by 25. For example, if you want to withdraw $ 35,000 a year from retirement, multiply this amount by 25 to determine yourself. You will need total savings of about $ 875,000.

Do not forget that this calculation is only a rough estimate and does not take into account several factors. On the one hand, social security benefits are not taken into account. (Although you should not rely on them to make ends meet, they are a good source of extra income.) In addition, this calculation assumes that you will be spending the same amount every year at retirement, which will not happen. probably not. Especially with the potential health care costs that could result, your expenses could easily escalate as you get older.

So, what is the solution to make sure you have enough savings? No matter how much you save, there is no guarantee that you will have enough to cover all your needs. Unforeseen expenses will inevitably appear and it is impossible to predict exactly how much you will spend in retirement. But by having a good estimate of how much you will need, you will be more likely to be prepared than if you just take it to heart and hope that everything will be fine.