We have all seen or heard about the “magic number” that Americans need to achieve when saving money to live comfortably in retirement.
Recent surveys from Northwestern Mutual, Charles Schwab and others have shown the number to be anywhere from $1.5 million to $1.8 million. Those numbers have steadily been growing over the years.
The latest Northwestern Mutual survey in April found that Americans believe they will need $1.46 million in retirement. That figure represents a 15% increase from the $1.27 million reported last year, and a 53% hike from the $951,000 target they had in mind in 2020.
Respondents in a survey this month by Schwab targeted $1.8 million as their retirement savings need. That was the same response given a year ago, but that figure was up from $1.7 million the previous year.
Those million-dollar figures, however, have left many, including professional planning experts, scratching their heads.
“Who the heck did they ask?” remarked one reader who goes by the social media handle, jrpower, and often leaves a comment after reading these survey stories on Financial Advisor’s website.
As it turns out, the reader is John Power, a semi-retired financial planner in Walpole, Mass., who has been practicing for 33 years.
“I don’t know where these people get their idea of how much money they need for retirement,” Power said when Financial Advisor reached out to him. “I did a lot of retirement plans, and I can tell you this: Almost nobody that I worked with has figured it out for themselves. They don’t do the work, they don’t know their financial situation, and they just don’t understand the components to figure it out."
“And so, when you do a survey of people that really don’t know what they are talking about, then you get an answer that is not meaningful,” he concluded.
Power added that he gets annoyed at seeing stories because he knows better. “I know from personal and professional experience that information like that isn’t useful, and we need to be useful to people,” he said, noting that there isn’t any one number when it comes to retirement because “it’s different for everyone and so, you can’t make any kind of critical estimate.”
Aaron Cirksena, founder and CEO of MDRN Capital in Annapolis, Md, agreed. “People feel like they should either have a $1 million or $2 million, some magical round number like that. But there is no magic number,” said Cirksena. “It’s not $1 million, it’s not $1.6 million, it’s not $2 million or $3 million. There is no number.”
Cirksena explained that he has clients with $5 million in savings that have a very high lifestyle and income need in retirement, and so they need a lot of their assets to support their needs. At the same time, he said, his clients that have $500,000 in savings will never touch their assets because they have pensions and Social Security and they live a lifestyle where they don’t spend as much, and they look at their assets purely as a legacy for their kids. “It really comes down to what kind of a lifestyle they are used to and what their goal is around their assets."
He believes the arbitrary $1million-plus figure that respondents indicate they need for retirement could well be an aspiration for the average earner who might have an income of $50,000. “Those people are honestly just getting by and that’s the vast majority. They are just attempting to scrounge and save whatever dollars they can into a retirement plan. So, I think it’s one of those things where a $1 million is an aspirational number,” he said.
On the other hand, he noted that there are those respondents who have higher than the median income that think they need $1 million or $2 million. But those people, he said, represent a small fraction of the population, maybe 10% of America.
Even so, surveys posing the question of how much you think you are going to need for retirement is the wrong approach because the average number that is reported sends the wrong message and “does not tell you anything about what you should be doing so you could retire successfully,” said David Blanchett, managing director and head of retirement research at PGIM DC solutions.
“Part of me feels like some of these surveys are almost like an arms race. You see $1.2 million, you see $1.8 million and sure, next year we’ll see $2 million and the next year, we’ll see $5 million and whatever else it is,” Blanchett said. “I just worry it’s an inaccurate representation of what most Americans need to retire.”
Blanchett said he prefers to focus on things like multiples, which consider factors such as age, lifestyle and how much income one will need outside of pensions and Social Security benefits. The average person, he stressed, has “significantly less” than $1 million in retirement savings. But that does not mean that you cannot have a good retirement, he said.
Just this week, a retirement report by Goldman Sachs Asset Management found that 39% of working baby boomers and half of Gen Xers report having less than $100,000 saved for retirement.
Blanchett added that it’s good to have a goal so that you can replace your pre-retirement income when you retire. And while he said many people are unable to save because life happens, it does not mean that you will not have a great retirement.
“It might just mean you remain the same way before you retired but it doesn’t mean you’re not going to have a great retirement," he said. "It might require some sacrifices and possibly some changes, but the key is to start saving when you can and kind of figure out things as you go.”
Surveys touting a so-called magic number for retirement should be approached with caution because they are about getting clicks, Blanchett and others said. “They really get traction," Blanchett said. "It’s pretty clear if you throw out a big number, it gets a lot of coverage.”
“I mean they are fun to look at and they make the reader think about their own position, but I think the important thing is the number doesn’t really mean much,” Power said, adding that how you live in retirement is a matter of personal preference.
For example, Power said, someone believing he or she can live comfortably in retirement on an annual income of $75,000 a year might sound crazy. But it’s possible with proper planning, especially if you don’t have a mortgage, he said, adding that other key factors would include where you live and the cost of living in that city or town.
Power, however, acknowledged that $75,000 might not work so well in high-cost areas such as suburban Boston, where he resides. “But you never know,” he said, citing a friend who lived comfortably in the Villages, Fla., on about $45,000 a year for about a decade.
“He had Social Security and a little bit of a pension, and he drew money from savings, which covered all his needs,” Power said. His friend, who had paid off his mortgage, “owned a car, paid his bills, had folks providing services to him, and he went out to dinner and did stuff,” Power said. “Life was not terrible at all.”
And though Power said it might be a little harder today to emulate the lifestyle his friend lived, due to the price of a home and other living expenses in Florida and elsewhere, “conceptually, the idea is not vastly different.”
The important thing for anybody thinking about how much they need for retirement is to focus on how much you are going get in guaranteed income from Social Security and/or pension and/or an annuity, and how much you have to save to be able to draw on a monthly, quarterly or annual basis to supplement that income, Power said. “That is the number you’ve got to work through.”
And to get there, Cirksena suggests working with a retirement planning specialist. “Not your everyday financial advisor and not necessarily a firm that works with everybody whether they are 30 years old or 50 years old and have $10,000 or $10 million,” he said.
“Go sit down with somebody that specializes in retirement planning because what you are going to get is that is going to be tailored specifically to you and your life and your lifestyle,” he said. “So, it’s not going to be some arbitrary number.”
Back in 2006 when the first baby boomers were turning 60, former Esquire editor Lee Eisenberg authored a personal finance book called "The Number." For a certain generation contemplating retirement at that time, the question made sense as a conversation piece. Today, however, the notion of retirement has become reality.