What is the magic number you need in savings to have a comfortable retirement? Americans now predict they will need $1.46 million to fund their third act — the highest estimate on record, according to research released Tuesday.
That’s a further increase in the amount of money U.S. adults believe they need to retire, according to wealth management firm Northwestern Mutual’s 2024 Planning & Progress study. But their actual retirement savings are far from their expectations of how much retirement will cost.
How much money do you need to retire?
The Northwestern Mutual survey, which included responses from about 4,500 Americans 18 and older reached in January, found that, across generations, people think they will need more than $1 million to retire comfortably.
The average estimate, $1.46 million, represents a 15% increase over last year. It’s also a huge jump from 2020, when people figured they would need $951,000 to retire.
But Americans’ actual savings aren’t even close to this level: In fact, they’ve declined as their cost expectations have risen. This year, the average amount saved by adults is just $88,400, slightly lower than the $89,300 Northwestern Mutual reported last year. That’s a $10,000 decline from the average retirement savings amount in 2021, when the metric hit its five-year peak of $98,800.
“The ‘magic number’ for people to retire comfortably has exploded to an all-time high, and the gap between their goals and progress has never been wider,” Aditi Javeri Gokhale, chief strategy officer at Northwestern Mutual, president of retail investments and head of the institutional investments sector, reads a press release.
This is true for every age group, the study found:
- Gen Z respondents, which includes people born between 1996 and 2021, had the highest expectations for what they would need in retirement, at $1.63 million, even though their average savings it was only $22,800.
- Millennials, born between 1981 and 1995, said they will need $1.65 million compared to their actual average savings of $62,600.
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- Baby boomers, born between 1955 and 1964, had the smallest gap between their retirement expectations and reality, estimating they would need $990,000 while their average savings was $120,300.
There is no universally agreed upon goal when it comes to retirement savings. The amount you need depends on factors such as your location, the age you want to retire, your lifestyle expectations and how long you expect to live. As a general rule, however, financial services firm Fidelity recommends saving 10 times your final salary to retire at 67. Another strategy is to save enough so that you have 80% of your pre-retirement income each year in retirement.
Preparing for retirement in a context of looming savings crisis
According to Javeri Gokhale, inflation could affect people’s expectations regarding retirement savings. As the costs of everything from housing to food have exploded in recent years, it’s natural for Americans to give more thought to how variables like rising prices will affect their retirement.
On the other hand, the decline in what they are accumulating reflects the growing pension crisis as competing expenses and other factors limit Americans’ ability to save. A February report from the Senate Health, Education, Labor and Pensions Committee found that more than half of Americans face financial insecurity in retirement. About half of people aged 55 and older have nothing to save.
The study also showed that Generation X, who are rapidly approaching retirement age, and baby boomers are not very confident in their retirement preparedness. Only 35% of Generation X said they planned to outlive their savings, while 37% of Boomers said the same. Only about half of Boomers and 40% of Gen Xers say they know how much they will need to retire.
Furthermore, Americans overall may be underestimating the impact of taxes on their savings. Only 30% said they have a plan to minimize their tax burden in retirement.
“Putting money in a 401(k) may not be enough to retire comfortably if the financial plan doesn’t address the impact of taxes on retirement income,” Javeri Gokhale said, adding that it could be taxed at 20% or 30%. % at the time of collection. .
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