Surveys show that the No. 1 concern of pre-retirees and retirees is whether they will have enough money for their entire lives. That is why an article published by USA Today and a column in The Wall Street Journal stating that you DO NOT need $1 million to retire comfortably gained a lot of attention.
In The Wall Street Journal column, economist Andrew Biggs analyzed responses from the federal Survey of Household Economics and Decisionmaking conducted between 2019 and 2022. According to the survey, most retirement-age Americans, aged 65–74, reported they were managing well financially, with about 85% living comfortably or “doing OK,” while only 15% said they were struggling. Biggs interpreted that data to conclude that retirees do NOT need $1 million to retire. Plain and simple.
But, although it is an attractive idea, the fact that 85% of retirees say they are “doing OK” does not mean that people are well prepared for retirement or that they don’t need to plan.
“Likely, the rising cost of living, inflation, expensive health care bills, and the realities of living longer mean that many people need more in their retirement accounts than they think or that the Biggs analysis suggests.”
With all of the uncertainties facing people in retirement, Biggs’s approach in the article may be overly simplified and too reductionist. In fact, we are seeing just the opposite.
With more Americans becoming increasingly concerned about whether they can make ends meet in retirement, people have become more and more focused on what that “magic number” is that guarantees financial security. Surveys also show that this search for a magic number may be more prevalent for those “do it yourselfers” who do not have sound professional guidance, and therefore may be feeling even more financial insecurity.
We discuss below the best ways to approach Biggs’s attention-getting headlines (and others who ascribe to his approach).
1. Work with a financial advisor and make a plan!
Fidelity, as well as other industry leaders, recommends that retirees have 10 times their income saved by the time they are 67. For a typical American household, that comes to nearly $750,000, or 10 times the median household income of $74,580. Depending on health, where retirees live, spending habits, housing costs, longevity and other unplanned expenses, many retirees may need more savings than they think. So how can retirees know whether they have enough retirement savings?
As mentioned above, having a plan helps retirees feel more confident in retirement and lessens stress. Advisors should work to help clients make a plan that takes into account many considerations including health, longevity, estate and tax planning. Helping your client feel confident in their future will make saving for retirement less stressful and it will likely feel more achievable.
The USA Today article fails to take into account rising health care costs, rising costs of living, increasing lifespans (especially for women), and other factors. In fact, the article shares that Alicia Munnell, director of the Center for Retirement Research at Boston College, estimates that at least 40% of retirees struggle financially. She points to the 2022 Federal Survey of Consumer Finances where only 58% of seniors said they could rely on savings in a financial emergency, reflecting significant financial insecurity among retirees.
It appears as if the solution is not so simple after all and that one data point is not enough to draw such sweeping conclusions.
2. Plan for a long life. ‘Longevity risk’ is real
It is no secret people are living longer than they used to, meaning people need to save more money to account for the “extra” years. Government data shows that on average Americans are living into their early 80s. Considering that most people retire around their mid-60s, that’s quite a few years to pay for, meaning two to three decades of living off of your wealth and income.
Taking into account the increasing cost of living, especially in urban areas, having a financial plan in place that includes a longevity strategy becomes necessary when ensuring you have enough to live on throughout your life. This fear is even more paramount for women, who on average live five to seven years longer than men, with an average lifespan of 79 years.
The article does not mention longevity risk, which can lead to a big miscalculation when planning how much a client needs in retirement. Especially, when taking into account the “wealth” effect, which refers to the significant correlation between greater wealth and more favorable health outcomes, many advisors will recommend that their clients plan for retirement with income to last into their 90s.
Planning for retirement needs to take into account income, cost of living, education, and health to create an accurate picture of how long to plan for. The worst outcome in retirement isn’t leaving too much money behind—it’s not having enough to go the distance.
Advisors should work with clients to create a longevity plan that takes into account the costs of living longer.
3. Take into account long-term care costs and aging without family nearby
Traditionally, families have provided crucial physical and social support for aging loved ones. However, societal changes such as declining birth rates and increased geographical separation mean fewer adult children are available to provide care. This shift underscores the growing challenge of aging without family nearby, putting more dependence on in-home and nursing home care, which can be expensive.
With 70% of people over 65 expected to require long-term care at some point, many retirees face the prospect of substantial unplanned expenses. Despite this reality, only 3%–4% of Americans 50 and older pay for a long-term care policy, leaving many retirees concerned about how they will cover these costs.
A typical American turning 65 will pay $120,900 in average long-term care costs. But individual costs will vary greatly, depending on how long you require care, where you live and how intense your needs are. A survey by AARP reports that 59% of retirees fear depleting their savings due to long-term care expenses.
The article hardly includes any discussion of long-term care or health-care expenses. But the numbers indicate that is one of the most significant expenses retirees face and not all of these costs will be covered by Medicare or insurance. At Taylor Financial Group, we model out a long-term care event that lasts anywhere from three to five years costing the clients anywhere from $300,000–$500,000 as part of the stress-testing of the plan. This approach helps clients prepare financially for unforeseen health-care needs in retirement.
4. Plan for health issues and chronic illnesses
Health care remains a major expense in retirement planning, consistently ranking among the highest costs for Americans. As we age, health-care expenditures rise significantly, particularly beyond age 85, where annual costs can be three times higher than for those aged 65–74, according to NIH data.
In fact, the per capita lifetime expenditure is $316,000, with almost one-third of lifetime expenditures occurring during middle age, while nearly half occur during senior years.
Financing health care is a key factor in financial planning. The reality is most everyone will face costly health issues as they age. According to the Centers for Disease Control, six in 10 adults in the U.S. manage one chronic disease, while four in 10 have two or more. When poorly managed, these conditions not only cost more in the later years to treat, but they can jeopardize plans to work longer, potentially impeding strategies to extend retirement savings.
Biggs does not seem to take these expenses into account, as he assumes that most people have some sort of savings that can get them through retirement. However, according to the 2022 Survey of Consumer Finances, only about half of senior households report having any retirement accounts. For those that do, the typical senior aged 65–74 has a retirement account of about $200,000. That number is far exceeded by average health-care costs faced by retirees, which will require some out-of-pocket contribution.
5. Have a contingency plan for large unplanned expenses
Building a reserve fund for both expected and unexpected large expenses is essential for securing a solid financial future.
Preparing for these contingencies reduces the risk of financial surprises during vulnerable periods, particularly in later stages of life. Addressing where and how clients wish to live as they age and involving adult children where appropriate ensures retirees can maintain their desired lifestyle.
Facilitating these discussions early with clients helps in planning for future care needs and ensuring financial preparedness. Essentially, advisors should stress test every financial plan for contingencies that you may be considering, or not even aware of.
Biggs estimates that with pensions, Americans don’t need as much savings. However, this point is mute since, according to the Bureau of Labor Statistics, pension plans are nearly extinct, with only 15% of private sector workers covered by them in 2022, down from about half in the mid-1980s.
The fact of the matter is that most retirees depend on their own savings and Social Security to cover their living expenses, putting more importance on each individual’s personal savings. While not everyone may need $1 million saved, many may need more than the average of $200,000 when considering all the costs we consider above.
The bottom line
In conclusion, how much someone needs in retirement depends on the client. However, the considerations above should be taken into account for each when helping them secure their retirement savings.
Likely, the rising cost of living, inflation, expensive health care bills, and the realities of living longer mean that many people need more in their retirement accounts than they think or that the Biggs analysis suggests.