The “magic number” Americans think they need to retire comfortably dropped to $1.26 million, down $200,000 from last year’s guesstimate, but remains well above what people actually have saved for their golden years.
According to a new study by Northwestern Mutual, Americans tempered their view of what they’ll need in retirement due as inflation eased somewhat. The $1.26 million total was on par with expectations in 2022 and 2023.
“It’s predominantly inflation-related. Inflation is still on everyone’s mind, but inflation is down and people’s idea of what they’ll need in retirement also came down,” John Roberts, Northwestern Mutual’s chief field officer, told MarketWatch.
While everyone’s retirement goal will vary based on individual circumstances such as where they’ll live and what lifestyle they want in retirement, Northwestern Mutual’s general guideline is that people should aim to save 80% of their preretirement income for each year of their retirement.
The gap between current savings and investments and the end goal is widening, Roberts said. Only 9% of Americans have 10 times their annual income saved for retirement, the study found. With an average annual U.S. household income of $80,000, Americans need about 15 times their annual income to meet their ‘magic number’ goal, Roberts said.
“There’s a significant gap,” Roberts said.
More than half (51%) of Americans think it’s somewhat or very likely they will outlive their savings, and 35% said they have not taken any steps to address that possibility. Only 16% of Americans feel confident enough to say the prospect of outliving their wealth is “very unlikely,” the study found.
One in four Americans who have retirement savings said they have just one year or less of their current income saved for retirement, the study found. The study, which polled Americans in January, was done before the recent market rout.
“Financial anxiety is at an epidemic level. The recent market activity only raises that level of general anxiety,” Roberts said.
The study comes as the nation is living longer and more than 10,000 people are turning 65 every day through 2027 in a demographic bubble known as “Peak 65.” As part of retirement planning, healthcare expenses continue to rise. A 65-year-old retiring in 2024 could expect to spend an average of $165,000 on healthcare and medical expenses during their retirement, according to a recent estimate by Fidelity Investments.
Overall, working-age Americans say they started saving for retirement at age 31 and plan to retire at age 65. But younger generations started saving sooner, plan to retire earlier, and expect to live longer, Northwestern Mutual found.
For example, Generation Z, those born between 1997 and 2012, started saving at 24, aim to retire at 61, and more than a third (34%) think it’s likely they’ll live to 100. That’s compared with baby boomers and older who started saving at 37, aim to retire at 72, and less than a quarter (23%) think it’s likely they’ll live to 100, the study found. Baby boomers were born between 1946 and 1964.
The generation most under pressure remains Generation X, born between 1965 and 1980, which is the first generation to need to self-fund their retirement without the help of pensions.
For Gen X, many of whom are approaching their retirement years, 52% have three times or less of their current annual income saved for retirement, Northwestern Mutual said. The majority (54%) of Gen X believe they will not be financially prepared for retirement when the time comes. That’s above 37% for Gen Z and 46% for millennials, who were born between 1981 and 1996.
“Gen X is approaching retirement underprepared. When you look at the rule of thumb, they are well below that,” Roberts said. “It’s time for Gen X to get moving.”
Just 6% of Gen X has 10-times their annual income saved for retirement, the study found.
A total of 48% of Gen X plan to work during their retirement years, compared with 40% of all Americans. More than half – 56% – of Gen X said they will need to work in retirement years due to financial need.
When it comes to American’s most urgent questions about retirement, concerns about Social
Security and inflation were more pressing than some other major planning challenges such as budgeting for healthcare expenses. For example, “Will Social Security be there when I qualify for it?” was cited by 33% of those polled, while 30% cited concerns about inflation rising in retirement, the study found.
On a positive note, Roberts said Gen Z is on a positive path by saving more, investing more and exploring other wealth-building opportunities.
“The optimism in that generation is higher,” Roberts said. “While some of the generations have hurdles to overcome, Gen Z is showing us a really different path.”
