For most Americans, the greatest question plaguing their journey toward retirement is, “Will I have enough?” And for many, the concern is certainly warranted. Becoming (and staying) financially independent is a major milestone, and yet it doesn’t look or feel the same for everyone.
There is no “magic number” or finish line you must cross in order to guarantee a safe and secure retirement. There are, however, a few tools and resources you can use to help more accurately predict your future financial needs, including the retirement income simulators financial professionals typically rely on to help their clients save and prepare strategically.
Let’s talk about what retirement saving and planning looks like for the average person in America right now, and how you can leverage the same simulators professionals use to help more accurately predict your future retirement income needs.
The current state of retirement preparedness in America
While we mentioned before there’s no magic one-size-fits-all number that will guarantee financial security for those entering retirement, many people do seem to have a number in mind.
In 2024, for example, a study showed that Americans believed they’d need $1.46 million on average to retire comfortably. Notably, this number has grown over year over year, jumping over 53% percent in the last five years alone. It’s also worth noting that high-net-worth individuals (defined as those with $1 million or more in investible assets) believed they’d need around $3.93 million to retire comfortably—nearly triple the average individual.1
Now, we have a few observations here.
First, there’s a major disconnect between how much people think they’ll need to retire comfortably and how much they actually have set aside in retirement savings.
The average retirement savings per individual in 2024 was around $88,400, which is $1.37 million shy of the estimated amount people believed they needed. Predictably, we feel the older someone is, the more they’re likely to have saved. However, Baby Boomers (those currently transitioning into and enjoying retirement) are still falling significantly short with around $120,300 in retirement savings on average.1
Another important factor here is time—and more specifically, how soon you start saving for retirement. Thanks to the power of compounding interest, time is a key component of any successful retirement savings strategy.
The longer you give your initial contributions time to grow, compound, and grow some more, the greater the long-term impact of your savings. For reference, here’s the average age at which each generation began saving for retirement:1
- Baby Boomers: 37
- Generation X: 31
- Millennials: 27
- Generation Z: 22
This is good news for the newer generation of investors and savers, as it appears they understand the importance of starting their retirement savings journey early. As long as they continue prioritizing their long-term saving strategy, they may be able to close the gap more successfully between their actual savings and anticipated needs as they near retirement.
We aren’t saying older Americans today can’t enjoy a financially secure and comfortable retirement as well. Rather, they may need to allocate more resources and a larger portion of their income to retirement savings later in life to help ensure their resources align with their needs and expectations for retirement.
How to anticipate your retirement income needs
As we mentioned above, Americans in 2024 believed they’d need, on average, $1.46 million to retire comfortably.1 The problem? This is a rather arbitrary number. It also changes every year without a lot of rhyme or reason.
To set yourself up for a more realistic retirement savings journey, we believe you should estimate how much you will likely need to enjoy a financially comfortable and secure retirement, based on a few individual factors:
- The age you plan on retiring
- How long you believe you’ll spend in retirement
- What you’d like to do in retirement (move to a new city, travel, start an encore career, etc.)
- Your current lifestyle and anticipated lifestyle in retirement
- Future possible healthcare and long-term care needs
Using that average $1.46 million projection, spread across a 30-year retirement, you’re looking at around $48,666 annually. Depending on your current salary and ongoing financial obligations, that may not be nearly enough to cover your needs.
Instead of ballparking your future “finish line” for retirement savings, consider leveraging the same simulators and resources professionals use to help their clients prepare for retirement.
Enter the Monte Carlo simulation
The Monte Carlo simulation is one of the most popular techniques used today, as it can help you anticipate multiple likely outcomes based on a set of variables and historical data. Ultimately, the simulation is intended to produce a model for the greatest chance of success under different future economic environments.
What makes the Monte Carlo a favorite among financial professionals is its ability to realistically simulate investment environments over a long period of time (say, the 30 years you plan on spending in retirement). Unlike more rudimentary calculations, this simulation doesn’t rely on a fixed set of assumptions. Rather, it recalibrates and repeats its calculations thousands of times across a span of minimum and maximum values to help create the most comprehensive view of your potential retirement income needs available.2
Essentially, the Monte Carlo simulation doesn’t assume the markets will perform perfectly during retirement—because in all reality, they likely won’t. The simulation can even take into account other variables, like interest rates and unusually high inflation—two concerns retirees have faced in recent years.
How the Monte Carlo simulation works
Let's take quick look at how the simulation can help you more accurately predict how much you;'ll need to live comfortably.
For example, you’ll need to figure out approximately how long you plan on saving for retirement, and how many years you expect to spend in retirement. The former may be easier to predict, based on your current age and anticipated retirement timeline. The latter, however, may require some guesswork. If you come from a long line of nonagenarians, for example, 30+ years may be a safe bet. If you or your relatives suffer from chronic illness, however, your anticipated timeline may be shorter.
You’ll also need to provide some additional information to help “paint the scene” of your current financial life. This may include:
- How much you’re currently putting towards retirement savings and other savings goals
- How much you’d like to spend each year in retirement (in other words, your anticipated withdrawal rate)
- How your 401(k), IRA, and other retirement accounts are currently invested
You can find free Monte Carlo simulation tools online that will prompt you to provide certain criteria and allow you to test future scenarios based on changes to different variables.
What is the probability of success?
When using the Monte Carlo simulation, your probability of success refers to how likely it is that your investment strategy will meet your future retirement income needs (under varying market conditions). In other words, what’s the likelihood that you’ll die with at least $1 left in your portfolio, based on your existing investment strategy, withdrawal rate, and other parameters?
To calculate the probability of success, you’ll need to tally up the number of outcomes in which money still remains in the account at the end of retirement (as compared to scenarios in which you run out) and divide it by the number many scenarios were tested.
Let’s say that out of 1,000 scenarios run, your investment strategy performed well in 800 of them. In that case, your probability of success would be 80% (800/1,000).
It may be unrealistic—and maybe even undesirable—to find a strategy or scenario that achieves 100% probability of success, which is why most financial professionals encourage investors to aim for a probability of success of around 80% to 95%.3 All investment strategies involve risk and may lose money (including principal), and there are no guarantees of future performance in any strategy.
Judging whether you have enough to sustain you through retirement isn’t a one-and-done experience. Running your data through the Monte Carlo simulation is something you should aim to do on an ongoing basis, especially as your life unfolds and you learn more about whether your assumptions are holding up to reality. For example, an 85% probability of success now can become much stronger as you experience retirement and make ongoing choices about your spending.
Will you be prepared for retirement?
While the recent rise in AI and technology can feel a little overwhelming at times, there’s no denying that it has transformed the way we predict and plan for the future. We believe that simulators, like the Monte Carlo, are useful for providing more nuanced and actionable estimates of what you may need to enjoy retirement.
Considering everyone’s standing on a different starting line, having a way to visualize the future outcome of your decisions today is a powerful tool for making the most of your journey leading up to retirement.
You may also find as you start interacting with these tools that you’d rather engage with a wealth planner during the retirement planning process. They can help you navigate these simulations while providing ongoing guidance and support during your journey to and through retirement.
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