Do Americans Really Need $4.3 Million To Retire?

Do you know how much you need to retire? It’s a question people ask themselves all the time. If you think it’s a challenge, you’re not alone.

“People don’t know how much they need at all,” says Michelle Richter-Gordon, co-founder of Annuity Research and Consulting in New York City. “They also don’t know when they will retire.”

Even if they try to determine what they need, most retirement savers use tools with a less-than-ideal track record or ones that contain a hidden conflict.

“The average American saver relies too heavily on online calculators created by investment providers which systematically overestimate projected retirement needs to increase investment levels and, not coincidently, their own revenues,” says Mark Nicholas, Founder of Transform Retirement in Green Bay, Wisconsin.

Despite these hurdles, if you ask them, people are all too willing to guess what they’ll need to retire.

What do people think they need to retire?

How much does the average American think they need to retire? If you’re typical, you probably think you need $4.3 million to retire in comfort. At least, that’s what a New York Life survey says. Is that number reliable?

“I have no idea what the survey considered an ‘average’ American to be,” says Harold Evensky, founder of Evensky & Katz in Lubbock, Texas. “It would certainly provide funds for a comfortable retirement, but it’s not very realistic for most investors.”

On the other hand, a Northwestern Mutual research report said people say they’ll need $1.27 million for a comfortable retirement. Of course, Baby Boomers have their own idea. Respondents of that generation told New York Life they feel they’ll need $2.2 million to retire, not the $4.3 million average of all respondents.

“Baby Boomers believe they only need half as much for a few reasons,” says Brett Bernstein, CEO & co-founder of XML Financial Group in Bethesda, Maryland. “One, they have already been living through retirement so have become accustomed to what they actually need. Two, they are older than someone who is considering retirement, so their runway of retirement years is shorter, this potentially needing less money. Three, many Baby Boomers may have older pensions whereas many companies today do not offer pensions as they did years ago.”

The problem with these kinds of surveys is that they may actually hurt retirement savings. Huge numbers tend to intimidate the average person. That means people might simply give up without trying to save for retirement.

Why might retirement projection numbers be misleading?

“There are a few reasons these numbers can be misleading,” says Clint McCalla, senior wealth advisor at LourdMurray in San Diego, California. “The first is the cost of living in a particular area and how this impacts retirement expenses. I live and work in San Diego, where the cost of living is much higher than what the rest of the country experiences. I grew up in Texas, which, in comparison to San Diego, has a far lower cost of living.”

“The second reason has to do with the cost-of-living differences during retirement for Baby Boomers and Millennials,” says McCalla. “Millennials will need to save much more in absolute terms to achieve the same quality of life in retirement as Baby Boomers. This isn’t a new phenomenon. Members of the Greatest Generation and the Silent Generation were in a similar retirement position relative to Baby Boomers 20-30 years ago.”

What do most people have when they retire?

Because each person has unique needs and requirements, it makes less sense to focus on what most people have. You’re not like most people. You’re you. It might be more helpful to look at what pre-retirees and retirees think about where they stand.

According to a May 2023 Federal Reserve report, “In 2022, 79 percent of all retirees said they were doing at least okay financially. Among retirees whose family income included wages or other sources of labor income, a slightly higher share (83 percent) reported they were doing at least okay financially.”

Contrast this to what the Fed reports on pre-retirees: “…only 31 percent of non-retirees thought their retirement saving was on track, down from 40 percent in 2021.”

Why is there a disconnect between retirees and pre-retirees? It could come down simply to retirees being past the point of uncertainty. They now know what retirement entails. The fear of the unknown is gone.

What do most people need to retire?

Understanding the difference in perceptions between retirees and pre-retirees still doesn’t answer the question of what you need for a comfortable retirement.

“It depends,” says Richter-Gordon. “The amount of annual income you need to retire, beyond Social Security, is often estimated at a percentage of pre-retirement income. If a median pre-retirement income is $60,000, and $20,000 of that comes from social security, then about $1 million is needed to generate $40,000 per year, assuming a 100 percent income replacement rate and a 4 percent (increasing nominally for inflation) safe withdrawal rate as a baseline.”

Don’t worry if this calculation seems daunting.

“No one knows how much they’re going to need, and most don’t know how to calculate future values or annual rates of return,” says Richard Bavetz, an investment advisor at Carington Financial in Westlake Village, California. “Most are guessing how much they will need. Starting with $2.3 million and simply using a net annual rate of return of 3.5% (minus an average cost of ownership) plus a withdrawal rate of $10,000 a month over 30 years gives a result that lasts through the time period.”

Still, you want to get a sense of where you are.

“The amount needed for retirement varies greatly depending on individual circumstances, such as lifestyle, location, taxes and healthcare costs,” says Ray Prospero, a partner advisor at AdvicePeriod in Riverside, California. “While $4.3 million might seem high, it could be a reasonable amount for some individuals aiming for a comfortable retirement with ample savings to cover some luxury expenses, such as multiple vacations a year. However, many Americans can retire with less by carefully planning and managing their finances. It’s important to consider your personal goals when determining how much you’ll need to retire comfortably.”

What should people focus on to determine what they really need to retire?

You want to take a look at several specific factors to come up with a proper assessment of what you need for retirement.

“How much someone needs to retire primarily depends on their spending and non-investment income,” says Kevin Estes, founder and financial planner at Scaled Finance in Bellevue, Washington. “Although healthcare costs rise with age, total spending tends to fall. Interest expenses fall as mortgages are paid down. Income tax, transportation, and clothing costs decline post-retirement. Additionally, food and entertainment expenses tend to decrease with age. Non-investment income is similarly important for the calculation. Social Security, pension, and other income may cover a substantial portion of expenses. They may also grow with inflation.”

There is a straightforward methodology you can use to calculate your own needs.

“You should think about how you’re going to replace your ‘net’ income, the amount that you are actually receiving after taxes, and other costs on a paycheck,” says Jason Grantz, managing director at Integrated Pension Services in Highland Park, New Jersey. “This number typically is 70-80% of your gross income, and then assume you’ll need to have that type of annual spend for approximately 20 years. Of course, others may disagree with these assumptions, but they’re a good place to start.”

It’s a good place to start, but don’t stop once you start. You’ll need to reassess your circumstances at least annually or whenever a major event occurs.