“That’s because you’re planning around a bunch of unknowables, like how stocks and bonds will behave over your drawdown period, what inflation will be like, and how long you’ll live, among others,” Benz observed.
“People aren’t even very good at predicting when they might retire. I’m afraid that people’s guesstimates of how much they need to retire are often not grounded in a rigorous, customized look at all of the key variables,” she noted.
What’s more, people tend to be strongly influenced by the recent past across the gamut of financial decisions, so it’s not very surprising that the recent bout of inflation caused “the number” to jump for a lot of people since 2020.
“I’m a firm believer that it’s not that difficult to create a plan for the accumulation years,” Benz said. “But once people get closer to drawdown mode, it’s important to get some formal, paid financial planning guidance. Online tools and back-of-the-envelope calculations won’t cut it.”
A planner can help savers determine if they’ve accumulated enough, how much they can reasonably withdraw during retirement, and what type of asset allocation and portfolio is reasonable to have, among other decisions.
“Most important, that person will be able to take into account the totality of your situation — whether you have a pension or might be willing to relocate or continue working part-time for a few years after your official retirement, for example,” Benz said. “Those kinds of trade-offs can be super important in determining how much someone needs to retire.”
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 forPGIMDC 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.
Shown in photo:Christine Benz (left), David Blanchett, Michael Fink, Jamie Hopkins and Marcia Mantell.
