Do You Need $1.5M to Retire? 5 Experts Weigh In on the New Magic Number

What You Need to Know

Americans expect to need at have $1.46 million on average to retire comfortably, a new survey shows.
That figure grew 15% from last year and by more than 50% since 2020.
Savers are better off focusing on a holistic approach to income planning, financial professionals say.

Survey data published this week by Northwestern Mutual shows that Americans’ “magic number” for retirement has surged to an all-time high — rising much faster than the rate of inflation and swelling more than 50% since the onset of the pandemic.

According to the poll, Americans on average think they need to save $1.46 million to retire comfortably, a 15% increase over the $1.27 million reported last year. That jump far outpaces today’s inflation rate, which hovers between 2% and 3%. The magic number has jumped 53% from the $951,000 target that Americans reported in 2020.

Given the dramatic increase over just four years, ThinkAdvisor reached out to a stable of retirement experts to get their sense of what’s going on behind the numbers.

These retirement planning VIPs were asked what they make of the nearly $1.5 million figure and why it has grown so quickly. The experts also offered insights into what savers should keep in mind about “magic numbers” and other potentially misleading averages in overall retirement planning.

While each expert offered a distinct take on the survey data, they all agreed that savers are better off focusing on a holistic approach to income planning rather than pursuing a single magic number.

Prolonged Bull Markets: Michael Finke

Since fewer Americans have pensions today, the cost of funding a lifestyle similar to the one they had before retirement will naturally be higher, points out Michael Finke, professor and Frank M. Engle Chair of Economic Security at The American College of Financial Services. For many, this means pouring money into stocks in the hope of riding a market wave to a steady and stable retirement.

“People often anchor [their savings projection] on the amount they have saved now and will likely answer with a value that they project they’ll have when they retire,” Finke observed. “Since we’ve essentially had a long-term bull market since 2010, with a couple of blips, this might be coloring people’s estimates.”

According to Finke, there’s also a tendency for savers to focus too much on recent inflation numbers and project them into the future. This “recency bias” can affect projections, he explained, especially when compared to a period of very low inflation like the one experienced before 2020.

Finally, the instability of Social Security has been in the news recently, and people may now feel like they need to save more to replace the shortfall.

“Economists would tell you that low or even negative real rates of return on Treasurys in 2020 would imply a higher ‘number’ than today, since investors can get a higher return from safe investments,” Finke said.

“The simple reality is that the number reflects the size of the lifestyle gap between Social Security and the amount you hope to spend, and the present value of this gap is discounted at the expected rate of return on your portfolio. A bigger gap, higher inflation, and lower expected returns will all drive the number up.”

Inflation and Social Media: Jamie Hopkins

The significant increase in the retirement savings target is “startling,” especially when viewed out of context, said Jamie Hopkins, the financial planning expert and CEO of Bryn Mawr Capital Management.

“It reflects not only inflationary pressures but also evolving lifestyles and expectations,” Hopkins said. “What I have seen is that expectations from younger generations are growing at a rate that is not based in reality and achievable levels of savings or income.

“To understand this surge, you need to understand there are massive socioeconomic shifts, such as rising healthcare costs and longer life expectancies, which have profound implications for retirement planning,” he explained.

Plus, Hopkins wonders whether social media — as a sort of curated and unrealistic lifestyle highlight real — is driving unrealistic expectations of spending and income needed to live one’s life.

Ultimately, he said, the escalating retirement savings target underscores the urgency for individuals to reassess their financial strategies, career paths, investment strategy and financial planning.

“As economic landscapes evolve, so must our approaches to retirement planning,” Hopkins noted. “It’s imperative for advisors to emphasize the importance of early and consistent savings, as well as diversified investment portfolios, to mitigate the impact of such rapid growth in retirement expenses.”

According to Hopkins, the $1.46 million figure may seem daunting, but it’s also essential to recognize that individual circumstances vary widely and averages in retirement planning are “almost useless” when it comes to an individual situation.

“Averages are useful only in the sense of global policies, education and rules of thumb, but when it comes down to the planning process, they often need to be thrown out,” he said. “Retirement planning should be personalized, accounting for factors like geographical location, lifestyle preferences and anticipated healthcare needs.

“Advisors must guide clients through comprehensive assessments to tailor strategies that align with their unique goals and circumstances. … Educating clients about the importance of budgeting, investing and adapting to changing economic realities is paramount in navigating the complexities of retirement planning effectively.”

Complex Planning Factors: Christine Benz

For Christine Benz, Morningstar’s director of personal finance and retirement planning, an important insight from the survey is the challenging planning about how much one needs for retirement — and how much can reasonably be withdrawn from a portfolio thereafter.

Unrealistic Expectations: Marcia Mantell

For Marcia Mantell, the author and Social Security expert, it’s important to note that the key survey question was open-ended: In a specific dollar amount, how much do you think you will need to save in order to retire comfortably?

“While I love these kinds of free-form questions, I think it is inappropriate to make the answers into some big indication of anything,” Mantell said. “Depending on my mood today, I might feel I need $4 million, because it’s gray and gloomy and I want to [leave my job] now.

“That might be the participant’s frame of mind. Ask tomorrow, when it’s sunny and they just got a promotion, maybe they’ll want to work for 10 more years. Then they might say they need $3 million to retire,” she explained.

In a nutshell, Mantell said, most people just have no idea how much they will actually need to retire.

“People don’t know how much they spend on groceries or gas each week, let alone how much they spend every year,” she warned. “People have no idea how much they pay for health insurance and other taxes that come out of their paychecks. They sure don’t know how to plan to make the net amount up when the paycheck stops.”

According to Mantell, the more interesting data in the report speaks to the gap between how much people currently have saved and what they think they need to live comfortably in retirement.

Put simply, the gap is huge, regardless of the respondents’ income level or the size of their retirement target. To Mantell, this shows that the financial services industry in general is not doing a good job connecting with most people.

“Those in the daily weeds of high finance and investment returns are typically well-paid,” she said. “Generally, they save well, so they’ve moved away from some simple concepts. … We’ve left real people adrift with no concrete benchmarks or targets for retirement saving. We’re too sophisticated as an industry now, and no one understands what to do for the long run. We do not speak in regular language.”

So, when “normal people” are faced with a question such as “how much do you need for retirement?,” they often answer with some unachievable number based on nothing.

Limits of Target Numbers: David Blanchett

David Blanchett, managing director and head of retirement research for PGIM DC Solutions, said he worries that putting a spotlight on outsized magic numbers could discourage people from saving, rather than inspiring them to start saving more and earlier.

“While I think this information can be useful, I also worry it creates a bit of a mental block for some people,” Blanchett said. “They’re going to be like, ‘I am never going to be able to save $1.5 million for retirement, so why try?’”

Also, Blanchett wonders just how accurate the results are for most Americans, who will likely get half (or more) of their retirement income from non-portfolio sources like Social Security retirement benefits.

“A nest egg of $1.5 million could generate something like $75,000 in income assuming a 5% withdrawal, which would obviously be reduced for taxes, but that amount plus Social Security would imply an income target of $100,000, which feels a little high [as an average],” Blanchett said.

“I’m honestly not a fan of targets like this because they aren’t going to be applicable to each person. The 4% rule — and note, I think 5% is better — can at least be adjusted to a given person’s situation. A target savings number is just going to be way off for lots of folks,” he explained.