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J.R. Whalen: Here's your Money Briefing for Tuesday, April 9th. I'm J.R. Whalen for the Wall Street Journal. How much money do you think you'll need to have saved to retire comfortably? $200,000? $500,000? Try $1.4 million. That's according to a recent survey of both working and retired adults.
Anne Tergesen: There is a lot of anxiety in part because of inflation, but I think a lot of it also is just because determining how much savings you're going to need and how much you can afford to spend is... That's a complicated math problem and a lot of people feel inadequate to it, so they just assume they need a giant number.
J.R. Whalen: We'll run the numbers with Wall Street Journal personal finance reporter, Anne Tergesen, after the break.The new magic number for retirement is $1.46 million. Wall Street Journal personal finance reporter, Anne Tergesen, joins me. Anne, $1.46 million needed to retire, how did that number come about?
Anne Tergesen: It's from a survey conducted by Northwestern Mutual of almost 5,000 people, and they've done this annually for the past couple of years, and that's the number that popped up as an average expectation of what people think they're going to need.
J.R. Whalen: Why is that number so high?
Anne Tergesen: One reason is inflation. Last year the number came in at $1.27 million, so it's up 15% from a year ago. Now inflation is trending at about 3%, so there is obviously a disconnect there, but part of it is that people have been a little bit scarred by the super high inflation that we've had post-pandemic, so they may be including expectations about inflation in that number.
J.R. Whalen: How does the $1.46 million figure compare to how much people actually have in their retirement accounts?
Anne Tergesen: The survey respondents on average have a pretty low number. About $88,000 is what they reported. That could include a lot of people who maybe don't have much because they're young, they haven't started yet. According to the Federal Reserve, the average American has saved about $330,000, and that's a 2022 number, so it's going to be up since then because the market has done well.
J.R. Whalen: But still, that's only a third of what the expectation is that people think they'll need.
Anne Tergesen: It's small compared to that $1.4 million. The Fed data shows that people 65 to 74 have average retirement savings of about 600,000.
J.R. Whalen: But is there really a magic number that will allow people to retire comfortably?
Anne Tergesen: No, there really isn't. There are some rules of thumb that people use to calculate off the top of their head how much they need. The way advisors do the math is often to take what somebody's earning right before retirement, assume they need about 80% of that, and then do a calculation of how long they might live. Or often advisors will assume a 30-year retirement just to be safe. So it involves math.
J.R. Whalen: Fidelity actually has a formula that people could follow along.
Anne Tergesen: There is a formula that Fidelity promotes, and the gist of it is, 10 times earnings. So you take your salary, you multiply by 10. That's a ballpark of how much you might need given certain assumptions.
J.R. Whalen: What factors typically go into how much money people will need saved up?
Anne Tergesen: A range of things. Your income, your marital status. Do you want to leave money to your kids? There's just a large number of things to consider if you really want to do that exercise correctly.
J.R. Whalen: When you consider the Fidelity recommendation of 10 times your average salary by the time you're 67, how could somebody get on track to meet that goal?
Anne Tergesen: Fidelity generally recommends that people save about 15% of their salary annually from about age 25 to about age 67. They recommend that level of consistent savings. Now that includes an employer match. It could be a little bit lower than 15% from your own salary if you get a match.
J.R. Whalen: And this is if your company offers your retirement program. But if somebody's employer doesn't offer a retirement program, how could they start one for themselves?
Anne Tergesen: Well, people can open IRAs and the contribution limits are much lower to IRAs than they are to 401(k), so that's a downside. For people who are self-employed there is a range of 401(k) options. They can use solo 401(k) as one example where they can basically open their own 401(k) if they want to.
J.R. Whalen: And if somebody is putting money into a 401(k) they have to take into account the fact that they'll be taxed on that when they take it out.
Anne Tergesen: Yes, or if they want to do a Roth, then they'll be taxed on it now, and then the money grows tax-free and they can take it out tax-free.
J.R. Whalen: The $1.46 million that people have in mind that they'll need to retire, how much of that comes from a fear factor?
Anne Tergesen: A lot of it probably comes from a fear factor. One of the problems with the retirement savings system in this country is... The defined benefit pension of old is, very few people have that anymore. That was a way that employers would just continue to send a paycheck. Retirees didn't really have to do any math to figure out, "How much do I need to save? How much can I spend in order to be able to afford to keep my savings going for as long as my lifespan?" There is a lot of anxiety in part because of inflation, but I think a lot of it also is just because determining how much savings you're going to need and how much you can afford to spend is... That's a complicated math problem, and a lot of people feel inadequate to it, so they just assume they need a giant number.
J.R. Whalen: That's WSJ reporter Anne Tergesen, and that's it for your Money Briefing. This episode was produced by Ariana Aspuru, with supervising producer Melony Roy. I'm J.R. Whalen for the Wall Street Journal. Thanks for listening.
