Today, I’ll show you:
- What the average middle-class American will spend in retirement,
- How much money they’ll need to make that work, and
- How this stacks up against what most Americans actually have saved.
What Is Middle Class?
But first, what does “middle-class” even mean? We all know the term, but at the same time it’s hard to define without a Simpsons reference.
So, the Pew Research Center has dominated the conversation around defining “middle class” in the U.S. According to their team of data nerds, middle class households are ones that earn between two thirds and two times the U.S median household income.
According to the latest numbers from the U.S. Census Bureau, the median household income is $74,580 per year. This gives us an income range between $49,720 and $149,160 that’s considered to be middle-class.
Now, this seems kind of crazy to me – because that’s a WIDE range. To put this into perspective, for a family of four, the poverty line sits at a little over $30,000. But I guess the Pew Center data nerds had to draw the line somewhere.
So, imagine an airplane. If we think of the main cabin seats as the middle class, around 51% of Americans would be sitting in this section. In comparison, 19% of lower-income households would be flying in coach while the remaining 30% of upper-income Americans would be sipping champagne in first class.
Middle Class Retirement Spending
So, how much will one of our middle-class, main cabin passengers spend in retirement? Since we have such a wide range of incomes that make up our data, we’ll consider three different cases:
- The low-end of the range,
- The median income, and
- The high-end of the range.
To calculate each one’s take-home pay, we’ll net out taxes and retirement savings.
For the low-end of our income range, we’ll assume:
Income: $49,720
Less: 401(k) Savings @ 5%: (2,486)
Less: Estimated Taxes: (7,080)
Net Income: $40,154
For our median case, we’ll assume:
Income: $74,580
Less: 401(k) Savings @ 5%: (3,729)
Less: Estimated Taxes: (12,852)
Net Income: $57,999
And for the upper-end of our income range, we’ll assume:
Income: $149,160
Less: 401(k) Savings @ 5%: (7,458)
Less: Estimated Taxes: (33,205)
Net Income: $108,497
So, will our middle-class retirees spend this much in retirement? Maybe.
I think that planning to spend the same amount in retirement a good place to start – while some work-related expenses will go away, other expenses such as hobbies or travel may increase once work is in the rear-view mirror.
But not everyone keeps up that kind of spending, so let’s start with that.
It’s a common practice in retirement planning to assume that you’ll only spend about 80% of your pre-retirement expenses once you quit work. This is known as the replacement ratio.
Yes, it is a rule-of-thumb, but let’s go with it.
For the lower-end of our income range, we have: $40,154 * 80% = $32,123
For our median earner, we have: $57,999 * 80% = $46,399, and
For the upper-end of our income range, we have: $108,497 * 80% = $86,798
Remember, these spending estimates are just a starting point for retirement planning. Spending will absolutely vary over the course of a 20 to 30 year retirement.
Net Needed From Investments
So, based on this income rage, how much will these middle-class retirees need?
We’re going to target a retirement age of 65 here for a few reasons, since they’ll be able to immediately apply for Medicare.
So, based on Social Security’s quick calculator, here are the expected retirement benefits for our middle-class retirees:
Low-End: $1,395 at age 65
Median: $1,791 at age 65
High-End: $2,781 at age 65
Let’s assume that they’re married, so let’s not forget to add in the spousal benefits:
Low-End: $698
Median: $896
High-End: $1,391
Okay! Now that we know:
- How much they’re going to spend, and
- How much they’ll receive in Social Security benefits,
Let’s use the good ol’ 4% rule to estimate how much they’ll need to have saved.
- Low End: (($32,123 / 12) – $1,395 – $698) / 4% = $175,330
- Median: (($46,399 / 12) – $1,791 – $896) / 4% = $354,030
- High-End: (($86,798 / 12) – $2,781 – $1,391) / 4% = $918,490
Actual Savings
Okay that’s great. We know how much we need.
But how much does the average American have saved?
According to the Federal Reserve, the average savings for Americans between 55 and 64 is $537,563, If we think back to our airplane analogy, it may seem like our middle-class passengers in the main cabin are okay.
But that’s not the case. The median savings for Americans in this age group is $185,000. In fact, the data says that 47% of them have zero retirement savings. So, there are a few passengers in the main cabin who have either been prodigious savers or inherited quite a bit of wealth.
And there’s one of the issues around basing “middle-class” on income rather than net worth.
What To Do If You’re Behind
So, what do you do if you’re one of the people in the main cabin who are behind?
While you can always reduce your expenses and increase your savings, and while I do recommend that, it’s always easier said than done.
If you need help figuring out how to bridge the gap, 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.
