$4.3 Million or $1.27 Million? What’s the Point of Scary Retirement Projection Numbers?

$4.3 Million or $1.27 Million? What’s the Point of Scary Retirement Projection Numbers?

August 22, 2023

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$4.3 Million or $1.27 Million? What’s the Point of Scary Retirement Projection Numbers?
by Christopher Carosa August 22, 2023

What is it? How much do you really need to save for retirement? Is it $4.3 million, which is what the average American answered when asked the question for a New York Life survey and as reported by The Motley Fool in August of 2023? Or is it $1.27 million, the number a Northwestern Mutual research report said people claimed they’d need for a comfortable retirement according to a June 2023 CNBC article?

Perhaps it’s better to seek the answer why financial service providers generate these surveys and why reporters never fail to report on them.

“Asking uninformed/uneducated people to provide educated answers is just to give them something to publish,” says Lawrence (Larry) Starr, VP at Cornerstone Retirement, Inc./QPC in West Springfield, Massachusetts. “The authors don’t care about what’s in the best interest of the participants (nor is it their job to care). And there’s the problem.”

Some think you can shock employees into saving for retirement. Others see the reality of out-of-this-world numbers as discouraging the average worker.

“Nonsensical ‘surveys’ like this do a disservice to the public by scaring the bejeebers out of them,” says Harold Evensky, Founder of Evensky & Katz in Lubbock, Texas. “Worst case convincing them they do not have a chance to meet the ‘goal’ leading them to simply give up planning for retirement.”

Oddly, financial professionals who talk to retirement savers on a day-to-day basis conclude most people don’t have a realistic understanding of what they’ll need to save. This practical experience runs counter to these survey results.

“Having seen innumerable reports over the years that people near retirement consistently underestimate financial needs in retirement and data on average incomes,” says Patrick Pine, Plan Administrator at UFW Medical Plan and Pension Plan in Tehachapi, California. “I see the averages in this survey as totally disconnected from those reports.”

On the other hand, retirement experts have long known that pre-retirees exhibit more pessimism about their retirement prospects than post-retirees actually experience. There’s a good reason for that.

“There is a huge disconnect between forecasts of people having a terrible retirement and people actually enjoying retirement,” says Tom Kmak, CEO at Fiduciary Decisions in Tigard, Oregon. “Why is that? People adjust… part time income, adjusting expenses, paying off their homes, not getting a new car every 5 years, etc.”

If you take a moment to look at average salary data, you’ll discover an ironic truth behind the $4.3 million number.

“The whole concept of saving your way to retirement is flawed,” says Stephen Davis, CEO of Total Wealth Academy LLC in Houston, Texas. “If you Google the average income in the US, it is $31,133 a year. Multiply that by 45 working years and you get $1.4 million. If a person makes $120,000 a year times 45 working years, you get $6.7 million. Only 15.3% of American make that much money. It would be hard for even this group to save up $4.3 million. I believe it is impossible.”

The twist is this: The bad news is only a fraction of the people will be able to save $4.3 million for retirement because the average salary is too low. The good news is most people won’t need to save $4.3 million because, thanks to living on a low average salary, they are accustomed to spending far less. If you are acclimated to spending less when you’re working, you’re likely to spend less when you’re retired. Spending less in retirement means you can afford to save less.

That’s not to say workers should ignore the priority of saving for retirement.

“Retirement security is an issue of utmost concern, and based on recent statistics, at least one-third of private-sector workers do not have access to an employer sponsored retirement plan,” says Michelle Capezza, Of Counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City. “States have been taking on a variety of approaches to tackle this issue with retirement marketplaces and payroll deduction IRAs, and many other models are emerging. Yet, it is highly unlikely that someone will be able to save or accumulate $4.3 million in these types of retirement programs. Hopefully, these kinds of million-dollar savings figures do not have a chilling effect and discourage workers from saving at all. It is important to set realistic goals based on personal situations, and to take advantage of any financial or retirement planning resources that may be available through employer programs, local advisors, or educational resources.”

Interestingly, the same New York Life survey that featured the average American saying retirement will require saving $4.3 million also had the typical Baby Boomer saying the need will be only $2.2 million. What accounts for this difference? They are closer to retirement and therefore have a better feel for what will be required. There is some thought that they may, therefore, be in a better position when it comes to retirement.

“Baby Boomers have lived full lives and realize that unexpected setbacks can and will interrupt or delay their progress,” says Richard Bavetz, an investment advisor, Carington Financial in Westlake Village, California. “Therefore, people should plan for the worst and hope for the best. While many resent the Baby Boomers for ‘hoarding all the money,’ everyone should try to learn from the success of what may be the most successful generation.”

That doesn’t mean there aren’t hurdles for younger generations.

“One of the significant changes for Millennials (and Gen Z) relates to the increase in the cost of housing as compared to earlier generations,” says Clint McCalla, Senior Wealth Advisor at LourdMurray in San Diego, California. “My great fear is that we will see this trend continue, inhibiting the ability of these two generations to purchase homes. Home ownership has long been the basis of wealth creation for the average American. Fixed mortgages enable this by freezing the core cost of housing for homeowners over long periods of time. Your income goes up, but your mortgage payment stays the same, creating free cash flow for increased retirement savings or possibly college savings. If renting in perpetuity is the new norm that we accept for the vast majority of our population, the retirement lifestyle enjoyed by past generations will become nothing more than a dream.”

Complicating retirement in modern times is the shift from families taking care of their own towards the government and employers minding peoples’ retirements. During the 19th century, when America lived in an agricultural economy, multiple generations would live together and work together. Each member of the family would have a job, no matter what the age. Elderly parents and grandparents were cared for in the home by their children. There was no need for third parties, whether they were government or employer.

The industrial age changed this dynamic. Younger generations moved away, and society became increasingly mobile. As a result, families no longer stayed together, and distance prevented them from caring for each other. More recently, the traditional family unit has become fragmented.

“The decline of the American family also plays a large part in the perception of retirement needs,” says Mark Nicholas, Founder of Transform Retirement in Green Bay, Wisconsin. “Americans increasingly feel that they’re all alone when it comes to saving for retirement. Where strong families and communities have provided a safety net historically, many Americans today view reliance on others as taboo, especially younger generations.”

It’s not as if there is no hope. This same “go-it-alone” approach may have more people assuming they can’t depend on outside sources to support them in retirement. The post-retirement entrepreneurial spirit has inspired many senior side hustles. This extra income can offset less than ideal retirement savings.

Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books.