The rising cost of living has forced many Americans to re-evaluate their “magic number” for retirement.

According to a new Northwestern Mutual study, Americans believe they need $1.46 million to retire comfortably. That’s 17% higher than in 2023 and a staggering 53.5% higher than in 2020.

Except for baby boomers, all generations are budgeting about the same amount for retirement. Gen Zers, Millennials, and Gen X believe they need $1.56 million to $1.63 million to walk off into the sunset.

Meanwhile, boomers expect to get by with $990,000, which is perhaps a more realistic target for those expecting to retire in the coming years.

Unfortunately, all generations report a massive gap between their retirement goals and savings. Survey participants were, on average, $1.37 million shy of their retirement goal.

Even boomers, who are nearing retirement, only have an average of $120,300 saved, putting them roughly $870,000 short of their retirement nest egg.

Wealth management firm Edward Jones believes Americans are slightly better prepared for retirement than the Northwestern Mutual study showed.

According to its data, Americans aged 45 to 54 have an average of $254,720 saved up, and those in the 55 to 64 age bracket have $408,420 tucked away.

These numbers are different, but they all tell the same story: Americans are well short of their retirement goal.

The biggest risk in retirement

The problem isn't just insufficient retirement funds; it's also the fact that Americans live longer.

According to Boston College’s Center for Retirement Research, a higher life expectancy means half of Americans risk not having enough income in retirement.

In addition to insufficient savings, living longer exposes retirees to greater inflation risk as the purchasing power of their nest eggs erodes over time.

One of the biggest reasons for the gap in savings was a shift in retirement responsibility from employer to employee. According to Christian Weller, a public policy professor at the University of Massachusetts Boston, that shift began around 2000.

“The cost and risks of planning for retirement are now the employee’s responsibility,” Weller explained.

“Just because people live longer doesn’t mean they can work longer,” he said, referring to the challenge retirees face in paying for rising healthcare expenses as they age.

Although the shift in responsibility for retirement planning took many boomers by surprise, younger generations have succesfully embraced it.

As Creditnews reported, millennials today are more retirement-ready than their parents, as their savings are on track to replace most of their pre-retirement income.

According to Vanguard, millennials are more financially prepared because of automatic enrollments in employer-matching 401(k) plans.

The true cost of retirement

Younger Americans are scrambling to save for retirement not without reason.

A 2023 study by The Alliance for Lifetime Income, a nonprofit organization headquartered in Washington, D.C., found that Americans are “dangerously” underestimating the cost of retirement.

What many overlook is how much healthcare costs will impact their finances as they age. Fidelity estimates Americans should plan to spend 55% to 80% of their current income in retirement.

Those planning for a more active retirement should budget for a 6% bigger nest egg compared to those with a less active lifestyle.

By these estimates, the typical household earning an average annual income of $75,000 should expect to spend $41,000 to $60,000 annually in retirement.

“The amount of time until you retire, spending habits, travel plans, health conditions, and unexpected costs can all vary dramatically,” said Beau Zhao, director of financial solutions at Fidelity.

“Let’s say you plan to travel around the world after you retire. You may want to increase the 80% guideline to 90% or 100%.”

Even with the perceived savings deficit, the U.S. economy is bracing for a “silver tsunami” in the coming years.

By 2027, an average of 11,000 Americans will reach retirement age per day. As Northwestern Mutual noted, “It’s the largest surge of Americans hitting the traditional retirement age in history.”

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