If you want to retire comfortably, investment companies and news headlines tell us you might need $1 million in the bank.
Or maybe not. A leading economist says you can retire with very little money: total savings of $50,000 to $100,000. He cites the experiences of real retirees as proof.
“You don’t have to be a millionaire to retire,” says one column’s headline Andrew BiggsDr. K. Sharma, a senior fellow at the American Enterprise Institute think tank, said the report was published in The Wall Street Journal in April.
Most Americans retire without $1 million in savings. The notion that we need that much money for a secure retirement stems from opinion polls, personal finance columns, and two or three general rules that pervade the financial planning profession.
Financial advisors tell you to save 10 times Your annual salary for retirement, enough cash to allow you to live on 4% of the balance for a year. In a widely reported survey, Americans said they would need $1.46 million in the bank to retire comfortably.
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Most retirees say they’re doing just fine, thanks
Biggs disagrees. To prove his point, the economist looked at the federal government’s responses. The domestic economy and Decision to be taken between 2019 and 2022.
The survey asked retirement-age Americans ages 65 to 74 how well they were managing their finances.
The majority, about 85%, said they were doing just fine: They were living comfortably, or at least “okay.”
Only 15% said they were struggling.
Biggs says the findings are important because most retirees have less than $1 million in the bank. In a federal survey, the typical senior reporting a satisfactory retirement had between $50,000 and $100,000 in savings.
“It is impossible to find any evidence that seniors need even $1.46 million in savings to be financially secure,” Biggs wrote.
According to their logic, retirees don’t need as much savings as financial planners say.
By Biggs’ calculation, the average couple retiring in 2022 will receive about $46,000 in annual Social Security benefits. While that amount “isn’t a lot,” he wrote, “a typical couple can expect to earn more than twice the senior poverty threshold before getting a dime from their savings.”
Biggs says retirement planners overstate how much income retirees actually need, and how much they will spend, primarily to drum up business.
Do you really need $1.46 million to retire in style?
Reactions to Biggs’ column ranged from praise to outrage. Some readers reposted the article on X with praise. One critic pinched“You don’t have to be a millionaire to retire and do nothing!!!”
Biggs is a famously conservative economist and something of a contrarian. Earlier this year, he and a colleague caused outrage with a paper calling for the abolition of 401(k) plans.
His new claim, that people don’t need millions of dollars to retire comfortably, runs contrary to common wisdom in the retirement planning industry.
“What about the rising cost of health care?” Lily Vasilieffa certified financial planner in Greenwich, Conn. “What if more adult children are living with their aging parents for free? What if there’s a divorce later on that cuts all assets in half at retirement?”
Perhaps the most provocative claim in Biggs’ analysis is that only a small number of retirees face financial challenges.
Alicia MunnellDirector of the Retirement Research Center at Boston College (and a previous one) Associate Biggs) estimates that at least two-fifths of retirees are struggling financially.
in the 2022 edition of the federal election Consumer Finance SurveyWhen seniors were asked how they would handle a financial emergency, only 58% said they could rely on savings. According to Munnell, this figure reflects the depth of financial insecurity among retirees.
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You don’t want to say, “I really made a mistake.”
Why, then, did only 15% of seniors in the other federal survey cited by Biggs say they were struggling?
Munnell believes many retirees are hesitant to discuss their financial problems in surveys.
“When people are asked about their well-being, I think there’s a kind of pride in them. You don’t want to say, ‘I really messed up,'” he said.
Although Munnell disagrees with Biggs on the financial well-being of American retirees, she appreciates his perspective that you don’t need a million dollars to retire.
“I don’t think it helps to set unrealistic savings goals and overestimate how much money people need for a comfortable retirement,” he said.
A million-dollar retirement is a frustrating pursuit, Munnell said, because most of us don’t retire as millionaires.
How much retirement savings do retirees really have?
A typical senior citizen with a retirement account About $200,000 According to data on households in the 65-74 age group from the 2022 Survey of Consumer Finances, savings of Rs 1.5 lakh crore were made in 2018-19.
But only half of these families report it Having retirement accounts at all.
Biggs and his colleagues disagree on this issue. They argue that many seniors have other forms of savings, let alone pensions. Munnell believes Biggs is overconfident about the security of American retirees.
“I actually don’t know of many people who have retirement savings but who don’t have a retirement account,” she said.
Retirement experts often say people will need it About 80% Using a portion of your pre-retirement income to fund your retirement years.
Only social security cover About half of itAccording to the Social Security Administration, we are encouraged to save. So, in order to have a comfortable retirement, we are encouraged to save.
One rule of thumb is that we should try to save 10 times our annual salary to maximize our Social Security income. For a typical American family, this is about $750,000 or 10 times the median household income $74,580,
And then there’s the 4% rule: Plan to withdraw 4% of your retirement savings to cover your annual living expenses, and adjust this figure each year for inflation.
Some experts say 4% is too low; others argue it’s too much. Either way, the message is clear: If you’re going to live on a single-digit percentage of your retirement savings, you’ll need a lot of it.
Retirees tend to reduce their spending significantly as they age
Biggs believes these rules are mainly there so investment houses can sell investment products, and personal finance websites can attract pageviews.
He points to the 80% rule: He argues that very few retirees will spend such a large portion of their working income in retirement.
“For a long time, 70% was the recommended average for middle-income retirees, and (in my view) it has been raised without particularly strong evidence,” he said in an email to USA TODAY.
He said it’s a bit harsh to criticize the 4% rule, “but one thing we know now is that retirees reduce their spending substantially as they age.” Biggs said older retirees travel less, eat out less and spend less on children. Medical costs go up, but insurance covers most of them.
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Retirement experts say these guidelines are meant as aspirational goals for working people planning for retirement.
“These rules are helpful for people in their early career and mid-career,” said Douglas Ornstein, a director at TIAA Wealth Management, a financial services nonprofit. “When you’re five years away from retirement, these rules are probably not as helpful anymore.”
Financial advisors say no two retirements are the same. Some retirees are still making mortgage payments or supporting grandchildren. Others have no dependents and no debt.
“If you’re living in Manhattan, then yes, you’ll probably need a million dollars, if not more,” he said. Christopher Lymana certified financial planner in Newtown, Pa. “If you’re living with the Amish near Lancaster, Pa., there’s not a lot going on. If you have $50,000, you’re probably fine.”
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