I wrote about different paradoxes of wealth based on Charles Schwab’s Modern Wealth Survey. In this article, I want to focus on another wealth paradox based on how much people expect to need in retirement versus how much they actually have.
This new data shows that Americans don’t really know how much they’ll need in retirement.
Expected Retirement Needs and Current Savings
Read Northwestern Mutual’s online survey of 2,740 U.S. adults from February 13 to March 2, 2023. The survey reveals projected retirement needs and current savings by age group.
The estimated amount of money required for retirement by age is as follows.
All ages: $1.3 million
20s: $1.3 million
30s: $1.4 million
40s: $1.3 million
50s: $1.6 million
Sixties: $968,000
70’s: $936,000
Here’s how much you’ll actually save for retirement by age:
All ages: $89,300
20s: $35,800
30s: $67,400
40s: $77,400
50s: $110,900
60s: $112,500
70’s: $113,900
Key Takeaways from the Retirement Expectations Survey
Here are five key takeaways from the survey about retirement.
1) Retirement expectations do not consistently increase with age
With inflation, rising demand, and rising needs, you would think that retirement expectations should increase for all age groups. But it wasn’t.
Those in their 40s expected $1.3 million in retirement benefits, $100,000 less than those in their 30s. Meanwhile, people in their 50s expected $1.6 million in retirement benefits, up significantly.
2) People in their 50s may be more anxious about old age
With only 10 years left until the traditional retirement age, people in their 50s are more likely to have more anxiety about retirement than people in their 40s. How else would you explain the massive $300,000 jump (25%) in your retirement needs compared to what you expected in your 40s?
It’s human nature to feel more anxious before a big event. And retirement is one of his biggest events. It is because of the fear of retirement that people suffer from the “One Year to Go Syndrome” for many years. It’s understandable to worry about life after work and whether you really have enough money to live happily without a job.
If you have children, your 50s is also the time when most parents have to worry about college fees. In addition, you have the responsibility of caring for your aging parents.
The potential need to feed three generations is likely a major reason for the significant increase in expected retirement needs.
3) You don’t need a lot of money to live comfortably in retirement
Curiously, those in their 60s needed only $968,000 to retire, $632,000, or 40% less than they expected in their 50s. what happened?
People always overestimate how much money they will need after retirement. There is the worst-case fear of running out of money after retirement. This rarely happens.
One of the big realizations after quitting my job was that I no longer needed to save for retirement. Given that I was regularly saving his 50%-70% of my after-tax earnings, it meant I could maintain a lifestyle even though I was earning a lot less.
Another reason for the much lower expected retirement needs could be the start of Social Security. All W-2 workers pay FICA taxes, but the benefits of Social Security can only be fully understood once they have been received. To me, I consider Social Security to be her 100% post-retirement income bonus, as I don’t model income in my retirement calculations.
Without debt, living on average Social Security benefits per capita of $22,000 in 2023 is feasible for most Americans. If you have a spouse, you should be fine living on social security benefits that average about $40,000.
People in their 60s may also be working part-time to earn additional income after retirement. Given the longevity, many in her 60s are choosing to stay active through consulting, teaching, and other side jobs.
Finally, sadly, people in their 60s are starting to lose their parents. As a result, less money is needed to care for one less generation. Inheritance may also be involved.
4) People in their 50s, 60s, and 70s are in financial trouble
A survey found that when you reach your 50s, you may not be able to save any more money even if you want to save money for retirement.
Those in their 50s have $110,900 in retirement savings, those in their 60s have $112,500, and those in their 70s have $113,900. Just as Americans are stuck in neutrality over the age of 50.
It’s a shame how little progress has been made in retirement savings over the last 30 years. But the lack of growth isn’t all that surprising, given that the projected amount of money you’ll need in retirement drops by 40% in your 50s and 60s.
I suspect that the flattening of retirement benefits from the 50s to the 70s may have something to do with decumulation. After retirement, we tend to sell stocks and other assets to pay for retirement. However, given that we are in perpetual uncertainty, we maintain a comfortable and stable amount of assets into our 70s just in case.
5) There is a large gap between projected lifetime needs and actual retirement savings
The most interesting aspect of the study is how the large gap between the expected amount of money needed to retire and the amount of money actually saved until retirement has almost closed for older participants.
Survey participants say they need between $936,000 and $1.6 million by retirement, but the maximum amount they can save in their 70s is $113,900.
Can you imagine thinking that 40 years after college you would need up to $1.6 million to retire comfortably? Still, saving an average of $112,500 by the age of 60 is at best? It reminds me of someone who was trapped in amber and could only speak or hear and could not move.
If you haven’t made any progress financially for 40 years, you will be devastated. You will suffer the pain of high expectations instead of the joy of low expectations. Saving just $2,000 a year for 40 years and achieving a compound annual return of 5% still translates to $253,000 in savings.
Do Americans really lack the financial discipline to accumulate more wealth? Is personal finance education sorely needed in our country? Or maybe Americans rationally don’t save more because they don’t need it. We have governments and wealthy parents!
Perhaps the reason why the median 401(k) balance is so much lower than my recommendations is the same reason Americans don’t save more for retirement. Life is a mess!
No retirement savings crisis yet
Survey after survey reveals just how little Americans are saving for retirement, but there is no retirement savings crisis yet. We are not hearing stories of seniors being put into homeless shelters every day because their retirement savings are 90% short.
Instead, we hear stories of baby boomers amassing trillions of dollars in wealth during the longest bull market in history. Perhaps Gen X and millennials will continue to inherit this wealth over the next 40 years.
Of course, there will be cases in which retirees in their 60s and older struggle to make ends meet. Life can often be difficult. But the American spirit is resilient. We tend to adapt and do whatever it takes to get by with what we have.
It reminds me of my father-in-law who secluded himself in a cabin in the woods. He lives in West Virginia on less than $18,000 a year. He worked as an electrician and handyman before his injury, and was never wealthy. However, he enjoys a peaceful life in the forest. If he ever needs financial help, we are happy to help.
Inspiration for making Financial Samurai more inclusive
Since 1999, I’ve only worked in New York City and San Francisco, so I’ve mostly written about the economic criteria faced by households living in the most expensive cities. But I’m probably ignoring a lot of people if their actual retirement savings for all ages is actually $89,300 for him.
For example, my net worth goals and age-specific 401(k) goals are probably too aggressive. I predict that most of you will be millionaires by the age of 60. As a result, I end up making people uncomfortable, or worse, making them angry and causing disharmony. Such strategies are bad for growth.
I have always written from first-hand experience, but I would like to practice writing and documenting content that resonates with more people.
One of our challenges in personal finance is maintaining trust after becoming financially independent or amassing above-average wealth. Let’s see if we can make FS more comprehensive!
Reader Questions and Suggestions
I would love to hear more from you about your retirement savings efforts. If there is a large discrepancy between the amount you expect to save after retirement and the amount you actually save, I would love to know why. Why do Americans want more retirement money than they actually have? Any other observations about retirement surveys?
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