If you listen to any financial advisor, they will tell you that retirement savings is all important for a financially successful retirement. They believe, as do many planning for retirement, that the size of your nest egg will be the determinant of a successful retirement.
Why people don't save more for retirement
The data says that the amount of your retirement savings IS NOT a major factor for those who are most financially successful in retirement.
Take a look at this chart from the Employee Benefit Research Institute (EBRI).
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Those seniors with income in the top 20% are in the top because of earnings. That likely means they continue to work or they own a business.
Financial advisors earn more if you save more (and invest in the stuff they want you to buy) but they don't seem to advise you to keep working. Yet, it is common sense that earnings will far over-shadow any savings you can do.
Let's take a look.
Let's say that you can continue working past age 65. Let's assume that you work only 4 months of the year at a seasonal job. For example, let's say they you go to H&R Block, take their training on preparing tax returns and work like crazy from January through April earning $20 per hour or $21,600 for the 4-month tax return season.
How much would you need to save in order to get $21,600 annually? Using the rule-of-thumb 4% withdrawal rule, you would need a nest egg of $540,000.
So at age 55 with little saved for retirement, which sounds easier:
a. save $540,000 in the next 10 years
b. work 1/3 of the year after age 65 and take off the other 2/3 of the year
If you think it may be impossible to save $540,000, you are in good company. As the data below shows, retirement savings are not a significant source of retirement income.
Retirement Savings Don't Matter Much
For the top 20% of income recipients, savings account for only 12% of their total income.
The notion of others saving $1+ million are rare. This is not common.
The data tells the clear story. Those with the highest incomes of retirement age (65+) have the highest income because of earnings, not savings.
I am NOT telling you to stop saving. Having a large retirement nest egg is wonderful.
I am saying that you should not feel like a "retirement loser" because your next egg is small.
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