I wrote about the various paradoxes of wealth based on a Charles Schwab Modern Wealth Survey. In this article, I want to highlight another wealth paradox based on the amount people expect they need in retirement versus how much they actually have.
According to this new data, I’m convinced Americans really don’t know how much they need in retirement!
Expected Amount Needed In Retirement Versus Amount Currently Saved
Take a look at this Northwestern Mutual online survey of 2,740 U.S. adults conducted from February 13 – March 2, 2023. The survey highlights the expected amount of money needed in retirement versus the amount currently saved by age.
The expected amount of money needed for retirement by age:
All ages: $1.3 million
20s: $1.3 million
30s: $1.4 million
40s: $1.3 million
50s: $1.6 million
The actual amount of money saved for retirement by age:
All ages: $89,300
Key Takeaways From The Retirement Expectations Survey
Here are five main takeaways about retirement from this survey.
1) The expected amounts for retirement don’t consistently increase by age
You would think the expected amount of money for retirement should increase at every age range due to inflation, rising wants, and rising needs. But it didn’t.
People in their 40s expected $1.3 million for retirement, $100K lower than people in their 30s. Meanwhile, people in their 50s expected $1.6 million for retirement, a big jump!
2) People in their 50s may have more anxiety about retirement
With ten years left until the traditional age range for retirement, people in their 50s are likely more anxious about retirement than people in their 40s. How else would you explain a significant $300,000 (25%) jump in the amount needed for retirement compared to expectations for those in their 40s?
It’s human nature to feel more jittery before a big event. And retirement is one of the biggest events of all! The fear of retirement is why people for many years suffer from “one more year syndrome.” The uncertainty of a life after work and whether one will truly have enough money to live happily ever after without a job is understandable.
If you have children, your 50s is also when the majority of parents have to worry about paying for college. In addition, there is also the responsibility of taking care of aging parents.
The need to potentially take care of three generations is likely a big reason for the dramatic increase in the expected amount of money needed to retire.
3) We don’t need as much money to live a comfortable retirement life
Curiously, those in their 60s only needed $968,000 to retire, down $632,000, or 40% less than what they expected they needed in their 50s. What happened?
People regularly overestimate the amount of money they will need in retirement. There is this worst-case fear that we’ll run out of money in retirement. This seldom happens.
One of my big realizations after I stopped working was that I no longer needed to save for retirement. Given I was regularly saving 50% – 70% of my after-tax income, this meant I could earn much less and still maintain my lifestyle.
Another reason for the much lower expected amount needed for retirement could be the start of Social Security. Even though W-2 workers all pay FICA tax, we don’t fully appreciate Social Security’s benefits until after they are received. For me, I see Social Security as a 100% retirement income bonus because I don’t model the income in my retirement calculator.
If you don’t have debt, living off $22,000, the average Social Security benefit in 2023 per person, is doable for most Americans. If you have a spouse, living off an average of ~$40,000 in Social Security benefits seems fine.
60-somethings may also be earning supplemental retirement income through part-time work. Given we’re living longer, many 60-somethings choose to remain active through consulting, teaching, and other side hustles.
Finally, sadly, parents of folks in their 60s begin passing away. As a result, less money is needed to take care of one less generation. There might also be an inheritance involved.
4) People in their 50s, 60s, and 70s are stuck with the amount of money
Once you get to your 50s, the survey shows you may no longer be able to accumulate more money for retirement even if you want to!
Folks in their 50s have $110,900 saved for retirement, $112,500 for folks in their 60s, and $113,900 for folks in their 70s. It’s like Americans are stuck in neutral once they reach 50.
It is disappointing to see barely any retirement savings progress for thirty years. However, given expectations for how much one needs in retirement declines by 40% from one’s 50s to one’s 60s, the lack of growth is less of a surprise.
I suspect the flatlining of retirement amounts from one’s 50s to 70s has to do with decumulation. Once we retire, we tend to sell some stocks and other assets to pay for retirement. However, given the perpetual unknown, we maintain a comfortable steady amount of wealth in our 70s just in case.
5) Lifelong massive gap in expected amounts needed versus actual amounts saved for retirement
The biggest curiosity about the survey is how the large gap in expected amounts needed to retire versus the actual amounts saved for retirement barely narrows for older participants.
Even though survey participants say they need $936K to $1.6 million to retire, the most survey participants can save up is $113.9K in their 70s!
Can you imagine for 40 years after graduating college thinking you will need up to $1.6 million to retire comfortably. Yet the best you can do is save on average $112.5K by your 60s? It reminds me of a person stuck in amber only able to speak or listen, but not move.
You’d be devastated if you couldn’t make any financial progress for 40 years. You’d suffer the pain of high expectations instead of the joy of low expectations! Even saving just $2,000 a year for 40 years with a 5% compound annual return would lead to $253,000 saved.
Do Americans really lack the financial discipline to accumulate more wealth? Is there a desperate need of personal finance education in our country? Or maybe Americans rationally don’t save more because we don’t need to. We have the government and wealthy parents!
Perhaps the reasons why the median 401(k) balance is so much lower than my recommendations are the same reasons why Americans don’t have more in retirement. Life is messy!
No Retirement Savings Crisis Just Yet
Although survey after survey shows how little Americans have saved for retirement, there is still no retirement savings crisis. We aren’t hearing stories of our elders getting placed in homeless shelters everyday due to their 90% shortfall in retirement savings.
Instead, we hear about tens of trillions of wealth being accumulated by the Baby Boomer generation during the longest bull market in history. Presumptively, Generation X and Millennials will go on to inherit this wealth over the next forty years.
Of course there will be cases of retirees in their 60s and beyond struggling to make ends meet. Life can often be hard. But the American spirit is resilient. We adapt and tend to do whatever it takes to make do with what we’ve got.
I think about my father-in-law who retired to a cabin in the woods. He lives off less than $18,000 a year in West Virginia. He was never rich working as an electrician and a handyman before he sustained an injury. However, he enjoys his peaceful lifestyle in the woods. Should he ever need financial help, we will happily provide.
Inspired To Make Financial Samurai More Inclusive
Given I’ve only worked in New York City and San Francisco since 1999, I’ve mainly written about the financial standards households face living in the most expensive cities. But if the actual amount of money saved for retirement across all ages is really $89,300, I’m likely talking past many folks.
For example, my net worth targets and 401(k) targets by age are likely too aggressive. I expect the vast majority of you to be millionaires by 60! As a result, I either turn people off, or worse, piss people off and create disharmony. Such a strategy is not good for growth.
Although I’ve always written based off firsthand experience, I want to practice writing and recording more content that is relatable to more people.
One of the challenges we in the personal finance is staying relatable after reaching financial independence or accumulating wealth beyond the average. Let’s see if I can make FS more inclusive!
Reader Questions and Suggestions
I want to hear from more of you about your retirement savings journey. If you have a large gap between retirement expectations and actually savings, I’d love to know why. Why do Americans think they want so much more money for retirement than they actually have? What are some other observations about the retirement survey?
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