Americans think they need $1.25 million to retire comfortably, new research suggests, but while that number may seem hefty — it still may not be enough.
A study from Northwestern Mutual released this week found that US adults anticipate they will need $1.25 million to retire comfortably, a 20% rise since 2021. That comes as Americans’ average retirement savings has dropped 11% to $86,869, down from $98,800 last year.
For many people, the idea of saving $1.25 million may seem insurmountable, but that lofty goal may not be enough to fund a retirement that could last decades, experts said.
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“There’s this increasing gap between where people are and where they might need to be. We’re seeing the financial anxiety gap getting larger,” said Christian Mitchell, executive vice president and chief customer officer at Northwestern Mutual. “People are really worried about retirement.”
While there is no magic number that fits all retirees, there’s one general rule of thumb that says people should expect to have 70% of their preretirement income available for each year of their retirement.
And that might be conservative. Steve Azoury, owner of financial services firm Azoury Financial in Troy, Mich., said people should expect to have as much as 80% to 90% of their preretirement income in retirement.
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“The idea is to retire, not just sit around. Go and have some fun and live your life. The 70% rule is really just for paying the bills and the have to’s,” Azoury said. “The roughly 30 years of your working life will determine the last years of your life – so work hard and save money.”
Azoury said workers should save 15% of their income for the duration of their careers and that should fund a comfortable retirement.
No more 4% rule?
By a different and potentially outdated measure, retirees should plan to withdraw just 4% of their retirement assets annually without fear of outliving their savings. That rule has recently been recalibrated downward and now some experts say retirees should draw down just 1.9% of their portfolio a year.
Read: The 4% retirement spending rule may be too high. Could you get by on 1.9%?
Add in market uncertainty, inflation, the prospects of shrinking Social Security benefits, and longer lifespans and the calculations for how much you need to retire gets complicated. People may need to work longer, save more or cut back their spending in retirement to make ends meet.
“Many of these benchmarks are just that – back of the envelope, interesting to look at, but so reductive,” Mitchell said. “What you need is a holistic understanding of your life and your goals and to resist the cleanness of one number.”
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“The key is to have a customized financial plan that’s updated on an annual basis. You can’t say any one number meets the needs of all people. It depends on lifestyle, cost of living, spending habits and longevity, among other things,” said Jeffrey Swett, a financial adviser and leader of the Swett Wealth Management of UBS in Boston.
Coming out of the pandemic at a time of rising inflation and volatile markets creates uncertainty for many people, Mitchell said.
“We’ve also seen upticks in spending year-over-year not only as a result of inflation, but also as people have resumed a sense of normalcy in their lives following the earlier days of the pandemic. These factors are leading many people to recalibrate their thinking about how much they’ll need to retire and how long it will take them to get there,” Mitchell said.
The expected retirement age edged up somewhat to 64, which is up from 62.6 last year, Northwestern Mutual found.
“Often people don’t get to choose when they retire. They may get sick, they may have to care for a loved one, they may get laid off. Their scenario in their mind might not play out. That’s why you need to look at multiple scenarios and prepare on multiple fronts and work with an adviser,” Mitchell said.
The study found low levels of confidence among Americans about their retirement preparedness, and they don’t have great faith in Social Security as a backstop. More than four in 10 (43%) people say they do not expect to be financially ready for retirement when the time comes. And 45% say they can imagine a time when Social Security no longer exists.
One-third of Americans expect to live to 100, the study found. An equal amount (33%) predicting there is a better than 50% chance they may outlive their savings. Still, more than one in three (36%) report that they have not proactively taken any steps to address this concern.
“It’s one of those questions on so many people’s minds – how long should I expect to work in order to save enough for retirement?” Mitchell said. “It’s really difficult to answer because there are all kinds of considerations to factor in.”
When asked about how the pandemic has impacted people’s retirement timelines, 25% said they plan to retire later than they had anticipated, and 15% said they plan to retire earlier.
The study also found that most adults (60%) prioritized personal fulfillment over salary and income potential in their careers.
Swett said COVID has caused clients to focus on the quality of their life. In some aspects the pandemic made people less interested in retiring because remote work reduced some stress of commuting and made working potentially more flexible.
“COVID absolutely changed things. People have really emphasized the quality of life. Remote work, in some cases, means people are actually working longer and are less anxious to retire because they can work wherever,” Swett said.