Americans think they need $1.25 million to retire. Is that enough?

Americans think they need $1.25 million to retire comfortably, new research says — but even though that number may seem hefty, it still may not be enough.

A study from Northwestern Mutual released this week found that U.S. adults anticipate they will need $1.25 million to retire comfortably, an amount that’s 20% higher than it was in 2021. That shift in goals comes as Americans’ average retirement savings has dropped 11% to $86,869, down from $98,800 last year.

For many people, the idea of saving $1.25 million may seem insurmountable, but even that amount may not be sufficient to fund a retirement that could last decades, according to experts.

Read: The limit for 401(k) contributions will jump nearly 10% in 2023, but it’s not always a good idea to max out your retirement investments

“There’s this increasing gap between where people are and where they might need to be. We’re seeing the financial anxiety gap getting larger,” said Christian Mitchell, executive vice president and chief customer officer at Northwestern Mutual. “People are really worried about retirement.”

While there is no magic number that fits all retirees, one general rule of thumb says people should aim to have 70% of their pre-retirement income available for each year of their retirement.

But that number might be conservative. Steve Azoury, owner of financial services firm Azoury Financial in Troy, Mich., said people should plan to have as much as 80% to 90% of their pre-retirement income in retirement.

Read: How bad could it (realistically) get for your 401(k)?

“The idea is to retire, not just sit around. Go and have some fun and live your life. The 70% rule is really just for paying the bills and the have-to’s,” Azoury said. “The roughly 30 years of your working life will determine the last years of your life — so work hard and save money.”

Azoury said workers should save 15% of their income throughout their careers, an amount that he said should fund a comfortable retirement.

No more 4% rule?

By a different — and potentially outdated — measure, many retirees plan to withdraw 4% of their retirement assets annually in hopes of not outliving their savings. But that rule has recently been recalibrated downward, with some experts now saying retirees should draw down just 1.9% of their portfolio a year.

Read: The 4% retirement spending rule may be too high. Could you get by on 1.9%?

Add in market uncertainty, inflation and the prospects of shrinking Social Security benefits and longer lifespans, and the calculations for how much you will need in order to retire gets complicated. People may need to work longer, save more or cut back on their spending in retirement to make ends meet.

“Many of these benchmarks are just that — back of the envelope, interesting to look at, but so reductive,” Mitchell said. “What you need is a holistic understanding of your life and your goals and to resist the cleanness of one number,” he added.

Read: Young investors can retire rich — or super rich — by following these steps

“The key is to have a customized financial plan that’s updated on an annual basis,” said Jeffrey Swett, a financial adviser and leader of the Swett Wealth Management Group of UBS in Boston. “You can’t say any one number meets the needs of all people. It depends on lifestyle, cost of living, spending habits and longevity, among other things.”

Coming out of the pandemic at a time of rising inflation and volatile markets has created uncertainty for many people, Mitchell said. 

“We’ve also seen upticks in spending year over year not only as a result of inflation, but also as people have resumed a sense of normalcy in their lives following the earlier days of the pandemic. These factors are leading many people to recalibrate their thinking about how much they’ll need to retire and how long it will take them to get there,” Mitchell said.

The expected retirement age edged up somewhat to 64 from 62.6 last year, Northwestern Mutual found.

“Often people don’t get to choose when they retire. They may get sick, they may have to care for a loved one, they may get laid off. Their scenario in their mind might not play out. That’s why you need to look at multiple scenarios and prepare on multiple fronts and work with an adviser,” Mitchell said.

The study found low levels of confidence among Americans about their retirement preparedness, and they don’t have great faith in Social Security as a backstop. More than 4 in 10 people (43%) say they do not expect to be financially ready for retirement when the time comes. And 45% say they can imagine a time when Social Security no longer exists.

One-third of Americans expect to live to age 100, the study found. An equal amount (33%) predict there is a better-than-50% chance they may outlive their savings. Still, more than one in three (36%) report that they have not proactively taken any steps to address this concern.

“It’s one of those questions on so many people’s minds — how long should I expect to work in order to save enough for retirement?” said Mitchell. “It’s really difficult to answer, because there are all kinds of considerations to factor in.”

When asked how the pandemic has affected their retirement timelines, 25% of respondents said they plan to retire later than they had anticipated, while 15% said they plan to retire earlier. 

The study also found that most adults (60%) prioritized personal fulfillment over salary and income potential in their careers.

Swett said COVID-19 has caused clients to focus on more than just money. And for some people, the pandemic made them less interested in retiring, because remote work reduced some of the stress of commuting and gave them more flexibility.

“COVID absolutely changed things,” Swett said. “People have really emphasized the quality of life. Remote work, in some cases, means people are actually working longer and are less anxious to retire because they can work wherever.”

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