When calculating how much money they’ll need to save for retirement, many people appear to be guessing.
A new report from data firm Escalent suggests the most common way folks set retirement savings goals is simply by doing the math “off the top of their head,” according to survey responses from about 4,000 savers participating in a retirement plan.
“Despite the industry’s efforts to date, participants aren’t able to grasp how much money is required to live comfortably in retirement until they get really close to making that important transition,” Sonia Davis, the lead author of the report, said in a news release.
According to Escalent, 4 out of 10 respondents admitted to calculating their retirement savings goals off the top of their head, or without much thought. Other popular methods of determining how much money they’ll need to retire include using online calculators (30% of those polled), consulting a financial advisor (25%) and creating customized spreadsheets (22%). (Respondents could select more than one answer.)
How much does retirement cost?
The firm also asked savers to estimate the amount of money they’ll need in retirement. The answers, predictably, ranged widely by age.
Gen Zers — or people born after 1996 — reported thinking they’d need the least amount: about $500,000. Younger, "second wave" baby boomers — generally considered to be born between 1956 and 1964 — said they’ll need the most, $1.2 million on average. The overall average was roughly $950,000, a lower reading than many other recent reports.
Lately, Americans have been saying they think they’ll need at least $1 million to retire comfortably. A June report from Northwestern Mutual put that price tag at $1.3 million. And in an August reading from Charles Schwab, workers expected they’ll need almost $2 million.
Some external factors are at play here, like inflation and stock market volatility, causing retirement savers to increase their expectations for how much money they think they’ll need to sock away for their golden years.
Also, as Escalent’s report suggests, people could just be winging it when asked.
Fortunately, at least a quarter of respondents had the right idea by consulting a financial advisor to help them come up with a tailored figure. Everyone's situation is different, but a good rule of thumb is to have saved up between 8 and 12 times your annual salary — depending on the standard of living you want to maintain — by the time you reach 67.
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