Most people are confused about how much money they need to retire comfortably, and financial services firms often add to the confusion.
Two recent surveys show the confusion, especially when compared with other data.
Americans who are near retirement say on average they now need $1.46 million to retire, according to the Northwestern Mutual 2024 Planning & Progress Study. That’s 15% higher than a year earlier and a 50% increase since 2020.
The increase is significantly more than the roughly 5% annual inflation during that period.
In another survey, about 49% of workers said they needed more than $1 million, according to the 2024 Retirement Confidence Survey from EBRI. Of the total workers responding, 21% said they needed $2 million or more.
These surveys point to a significant retirement crisis in the making, because the Northwestern Mutual survey found the average worker has less than $100,000 saved for retirement.
But other information tells a different story.
In the EBRI survey, of those already retired 33% said they needed less than $500,000 to support their spending. Only 41% said they needed $1 million to $2 million. And only 12% said they needed more than $2 million.
Retirees also reported needing considerably less money than in the two surveys of pre-retirees, according to the Survey of Household Economics and Decisionmaking by the Federal Reserve.
In that survey many who reported “doing OK” or “living comfortably” in retirement had less than $250,000 in savings.
One reason for the discrepancy between retirees and pre-retirees could be that most pre-retirees have no idea how much money they’re spending now and how much their planned retirement lifestyle would cost.
Most pre-retirees also don’t realize that data show most retirees reduce their spending (after adjusting for inflation) as they age. Most financial plans, however, assume spending steadily increases with the inflation rate each year.
Another possibility is that pre-retirees underestimate how much they’ll receive from Social Security and many probably assume they’ll receive little or nothing from the program.
Student loans plus rising housing costs and the recent stickiness of inflation probably scare a lot of people into overestimating their retirement spending needs.
The key first step to any retirement plan is to make a careful estimate the current cost of your planned retirement lifestyle. Don’t rely on guesswork or a guesstimate.
The record of current retirees indicates that the vast majority of Americans will be secure in retirement if they save steadily, invest reasonably, and make good decisions about Medicare, Social Security, and the other retirement finance issues.
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