Retirement costs: Americans now expect they’ll need $1.25 million

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Plunging markets and soaring inflation are weighing on Americans’ retirement expectations, and things aren’t looking good.

Retirement planning in the country is getting tougher by almost every metric, according to a new study on retirement planning from financial services firm Northwestern Mutual. The main finding, released Tuesday, was that savers said they now thought they would need as much as $1.25 million to retire comfortably.

This equates to a 20% increase from 2021 and a 32% increase from February 2020 (pre-pandemic).

“For many, this is a time of uncertainty, driven primarily by rising inflation and market volatility,” Christian Mitchell, executive vice president of Northwestern Mutual, said in a news release.

How much money do you need to retire?

Retirement can be expensive. Major costs include health care, housing, utilities, and food — these are just the basics.

In a Northwestern Mutual poll, 52% of respondents said they don’t know how much they need to retire comfortably. About 17 percent said they expected to need at least $1 million. (Across all respondents, the average amount needed to retire comfortably was $1.25 million.)

The exact amount you need for retirement depends a lot on the situation, but some experts suggest that savers should save about 10 times their annual income in retirement, or set aside 15% of their salary each year.

While Americans expect they’ll need to save eye-popping amounts of money for retirement, the amount they’re actually saving has plummeted. The average American adult’s reserves are now $86,869, down 11 percent from last year’s $98,800, Northwestern Mutual said.

This saving conundrum has left many people losing faith in retirement and delaying the age of farewell to the workplace. According to the Northwestern University survey, 43 percent of respondents said they were not financially prepared for retirement, leading to a rise in the average age at which they expect to retire: it is now 64. Last year was 62.6 years old.

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Northwestern’s findings are not a flash in the pan. The report, based on a February survey of nearly 2,400 adults, follows a series of recent studies showing that serious cracks are forming in many Americans’ retirement plans.

Savers say inflation is the No. 1 barrier between them and a comfortable retirement, according to a recent report by financial firm Schwab. Likewise, research from the National Retirement Institute found that 4 in 10 workers aged 45 or older want to delay retirement in order to further increase their income.

Inflation, which has held steady near 40-year highs throughout 2022, played a key role in these gloomy reports. Rising prices not only limit how much people can save now, but they can also significantly increase retirees’ spending later — especially when it comes to big bills like health care.

A silver lining? The IRS and Social Security take inflation into account to help retirees and savers.

On Friday, the IRS announced that the amount savers can contribute to their 401(k) (and similar employee retirement accounts) has increased from $20,500 to $22,500, a nearly 10% increase. Likewise, price increases have led to the largest cost-of-living increase in Social Security checks in 42 years.

Both changes will take full effect in 2023.