The New Magic Number for Retirement Is $1.46 Million. Here’s What It Tells Us.
Apr 11, 2024
There is no single formula for how much
you need to save in your 401(k)
The stock market gave
401(k)s a 19% boost last year. Inflation cooled. Still, lots of people
feel no closer to hitting their magic number for retirement.
It
would take $1.46 million to retire comfortably, according to a recent survey of
4,588 adults released Tuesday by financial-services company Northwestern
Mutual. That is up from $1.27 million a year ago. And over $1 million more than
the average survey participant’s nest egg.
The
rising magic number reveals more about retirement anxiety than retirement
planning, said Teresa Ghilarducci, an economist at the New School for
Social Research in New York City.
People
don’t really know how
much money they will need in retirement, and often overestimate it,
Ghilarducci said.
While
$1.46 million might make sense as a savings target for some higher-income
households, most families with lower incomes likely need far less, she said.
“Anxiety
about retirement is sky-high,” she said, noting that concerns about the costs
of healthcare and long-term-care add to the worry.
Some
of this nest-egg disconnect stems from the shift from pensions to 401(k)-type
plans, which require savers to make investment
and planning decisions on their own.
Retirees
with little financial background have to figure out how to make their nest eggs
last for as long as several decades, a task
Chief
Executive Larry Fink called “an impossible math problem” in an annual
letter to shareholders last week that raised alarms
about a retirement crisis.
It
is hard for workers to imagine what their 401(k) balance ultimately buys in
retirement. The Wall Street Journal profiled retirees with $1
million, $2
million and $5
million to show the range of lifestyles and challenges people face.
About 2% of Fidelity Investment’s 401(k) participants have a balance of $1 million
or more.
Understanding
how far retirement savings will go is further complicated by the uncertain
future of Social Security.
Younger workers, in particular, worry about what looming
shortfalls will mean for benefits, said Kurt Rupprecht, partner and
private-wealth adviser at K Street Financial, a Northwestern Mutual Private
Client Group.
The
retirement program is projected to deplete its reserves in a decade, triggering
a 23% reduction in benefits unless Congress acts.
Millennials,
those born between the early 1980s and late 1990s, sharply raised their
estimates compared with before the pandemic. When they retire, millennials now
expect to need $1.65 million. That is up from just under $1 million in
2020. Baby boomers, born between 1946 and 1964, said they would need
$990,000, up from $830,000 in 2020, according to the poll, the latest
installment of which was conducted in January.
People
who have at least $1 million to invest think they will need about $4 million to
retire comfortably, up from $2.1 million in 2020.
Retirement math
There
is no single magic number or formula for knowing when it is financially safe to
retire. The actual size of the nest egg you need depends on factors including
your income, marital status, expected longevity, where you plan to live in
retirement, and whether you want to leave money to heirs, Rupprecht said.
There
are rules of thumb to measure your retirement readiness. One shortcut devised
by Fidelity Investments, calls for saving 10
times your annual salary by age 67.
Using
that guideline, a household with around the median income of $75,000 would need
to have $750,000 saved by age 67. A family earning at least $153,001, the
threshold for the top 20% of earners, according to the 2022 U.S. Census, should
save $1.53 million or more.
To hit
those targets, Fidelity recommends saving about 15% a year starting at age 25,
including any contribution your employer makes to a 401(k)-type account.
This approach is designed to
replace 45% of your income—or $45,000 annually for someone with a $100,000
salary—with Social Security providing the rest.
According
to the Federal Reserve, the average American has saved $333,940 in 2022, up
from $282,100 in 2016. Households ages 65 to 74 have average retirement savings
of about $609,000 in 2022, according to the Fed.
Those
polled by Northwestern say they have saved an average of $88,400.
Is it enough?
People
often end up retiring earlier than expected, due to job changes or health
issues. Others find they already have enough saved.
About
35% of retirees the nonprofit Employee Benefit Research Institute surveyed in
2023 said they retired sooner than planned because they felt they could afford
to, down from 41% in 2021.
Younger
workers are getting a head start on saving for retirement, compared with older
generations. Those in Gen Z, born around 1997 or later, report starting at age
22, compared with 27 for millennials. Baby boomers, who began their careers
before employers widely offered automatic enrollment into 401(k) plans, started
at an average age of 37, the survey said.
The
early start is putting younger workers on
track to surpass their elders in retirement savings, according to data
from Vanguard Group.
By the
time older millennials, around 37 to 41, now earning a median salary reach
retirement, Vanguard estimates they will be able to replace almost 60% of their
income with Social Security and savings from sources including their 401(k)s
and individual retirement accounts.
Gen
Xers and the youngest baby boomers with median earnings are, by contrast,
likely to replace about half of their paychecks in retirement.
Source: Wall Street Journal