The new magic number for retirement

May 31, 2024

The “magic number” for retirement in the United States has risen faster than the inflation rate in recent years, swelling more than 50% since 2020. Let’s look at this number and what it means when investing for retirement.

Deciding how much money to save for retirement has always been a complex mix of art and science, and clients often want a ballpark number for what is typical. For over a decade, an annual research study from Northwestern Mutual has provided that number.

Their 2024 study puts the magic number — the amount Americans on average believe they will need to retire comfortably — at $1.46 million.

In 2020, the number was $951,000. Adjusting for the cumulative inflation over that time (21.1%) would bring that figure today to about $1.15 million. So, what is behind the extra $300,000 increase?

Living Longer & Better

A primary driver behind this new retirement target is increasing life expectancy. The U.S. life expectancy is 79.25 years, the highest it’s ever been. With recent and expected medical advances, it’s predicted that it will become more and more common in our lifetimes for people to live to 100 or beyond.

If you retire at 65, having a nest egg last you 20-some years is much different than one needing to last nearly 40 years. As a result, people need to either retire later or have more money set aside — or both.

The book The Longevity Revolution explores these advancements and underscores the importance of planning for a longer retirement and creating a “Personal Longevity Plan.” Similarly, we encourage clients to think about retirement life planning, not just retirement financial planning.

Additionally, the American standard of living has risen over time, increasing the cost of living. While inflation tends to cycle and can be managed to some extent, the overall increase in the cost of living requires more significant retirement savings. From better healthcare and more extensive travel to various lifestyle improvements, these factors collectively elevate the amount needed to retire comfortably.

What’s Included in the $1.46 Million?

The $1.46 million magic number for retirement primarily refers to invested assets. However, retirement savings can encompass other assets if they can be used to pay for expenses during retirement. For example, some people have assets like a home or a cabin that they intend to sell to fund their retirement. Thus, while the core of this number is invested assets, the total retirement portfolio might also include real estate and other tangible assets.

What Does the $1.46 Million Get You?

A rule of thumb is to withdraw 4% of your portfolio value annually during retirement if you want your money to last for 30 years. If your portfolio is worth $1.46 million, that would give you an annual income of $58,400 plus Social Security benefits.

The current average annual social security payment is $22,884, so $30,000 is a good round estimate if you’re planning for several years out. Or you can look up your personal SS benefit estimate, adjusted to the age at which you begin drawing payments, which you can begin anywhere from age 62 to 70.

Consider whether your portfolio withdrawal and SS payments together will cover your annual expenses and whether you want the ability to make withdrawals for more than 30 years.

When planning for retirement and deciding what annual income will be reasonable, think about your current expenses and which will increase, decrease, or remain the same throughout the four stages of retirement. Some expense to consider include:

  • Basic living expenses: Food, utilities, property maintenance, and other essentials.
  • Taxes: Taxes don’t stop in retirement, and understanding their impact is vital.
  • Healthcare: Healthcare costs typically increase faster than inflation, especially as people age.
  • Travel and leisure: Many retirees have more time to travel and pursue hobbies, which can be surprisingly expensive.
  • Legacy and charitable giving: Many people wish to leave money for their heirs or donate to causes they care about.
  • Unexpected/occasional expenses: From home improvements to new vehicles, retirees often face unexpected costs.

Underestimating expenses is a common pitfall. Once retired, many individuals find themselves with new time and freedom, leading to new (and often costly) pursuits.

Common Worries Among Clients

Clients frequently express several concerns about their retirement:

  • Sufficiency of funds: The fear of outliving their savings is prevalent.
  • Inflation: Extended periods of high inflation can erode purchasing power.
  • Longevity: Living longer than expected poses financial challenges.
  • Market performance: Poor market performance over an extended period can significantly impact retirement savings.

To address these concerns, financial advisors model long-term financial projections for various scenarios. These projections can show the level of savings needed to add goals like buying a new car every five years, starting a charitable fund, or paying for grandkids’ college tuition.

If clients want us to illustrate outside influences like sustained higher inflation, we use a Monte Carlo simulation that runs a statistically significant number of scenarios to give a reliable prediction.

Planning for the New Magic Number for Retirement

Achieving the new retirement target — or your own custom target — requires strategic planning and ongoing management. The best way to prepare is to work with a comprehensive financial planner who can partner with you to create a detailed plan and to monitor and adjust the plan as circumstances change.

While $1.46 million may seem like a daunting number, with careful planning, sound advice, and proactive management, it is an attainable goal for many. By understanding the factors driving this new target and preparing accordingly, you can look forward to a financially secure and fulfilling retirement.

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