Americans believe they need a substantial $1.26 million to retire comfortably, according to a study from Northwestern Mutual that polled over 4,600 adults in January. However, reaching this goal is challenging for many. To attain $1.26 million based on a 7 percent annual return in investments, a person would need to save approximately $1,035 each month, or $12,420 annually.
Saving 15 percent of their income, a common retirement target, requires an annual salary of around $82,800, over $20,000 more than the national median salary of $61,984. The study reveals that 25 percent of Americans have saved only one year or less of their current annual income for retirement, and over half fear they will be unprepared. Retirement is becoming increasingly difficult for many Americans due to various factors.
The cost of living continues to outpace wages, and traditional retirement structures, such as defined benefit pensions, have largely disappeared. Most workers now rely on self-directed savings plans, if available at all. Bobbi Rebell, CFP and personal finance expert at BadCredit.org, explains, “It has never been easy, but pensions and family support systems used to help control the variables.
Retirement savings expectations versus reality
Now, those foundations have eroded.”
Rising housing costs and changes in employment patterns further complicate retirement savings. Many younger generations are not buying properties due to high house prices and substantial mortgage payments, while renters face increasing housing expenses that eat into potential savings.
Additionally, frequent job changes and the prevalence of gig work hinder long-term savings accumulation. Student loans can also linger well into retirement savings years, exacerbating financial strain. Despite these challenges, some Americans are choosing to work longer.
About one in five Americans aged 65 and older were still working as of 2023, nearly double the proportion from 35 years ago. While working longer can provide purpose and an extra layer of financial security, for many, it is a necessity rather than a choice. As Americans navigate these financial turbulences, understanding the nuanced impact of economic factors on personal savings can help in making more informed and realistic retirement plans.
However, the disparity between retirement expectations and reality remains a significant source of financial anxiety for many.