December 2, 2023

This time it’s in the latest Charles Schwab Retirement Survey. Among 1,000 people surveyed, the average respondent figured he or she needed to save $1.8 million to retire. (That figure is up from $1.7 million in the same survey a year earlier.)

Touchingly, 86% also told Schwab they were either “somewhat” or “very” likely to achieve their goals.

Er, no.

If the numbers show anything, it’s that most people don’t understand math, don’t understand finance and are wildly out of touch with reality.

Some simple calculations will show that these figures are all wrong.

First, let’s start with the bad news. There is no way 86% of people should be “very” or “somewhat” confident that they are going to hit that $1.8 million target, or anything like it. Let alone that 37% think they are “very” likely to hit it.

Median retirement-account balance at the moment? Try $27,000 and change, says 401(k) giant Vanguard.

Even that’s overstating the picture. The Federal Reserve’s most recent triennial Survey of Consumer Finances says the median American household has $26,000 in total financial assets, including savings accounts, life insurance, 401(k) plan and the like. Among those aged 45 to 54, the figure is $37,000, and among those 55 to 64 it’s $47,000. How anyone thinks they are getting from there to $1.8 million by retirement age is a mystery. Magic carpets? Magic beans?

Granted, the survey is from 2019, but the intervening pandemic period won’t have changed the picture that much — in either direction.

It’s not clear from the survey whether those polled included the value of the equity in their homes. Throw that in, and the median household’s total net worth rises to $122,000. Among those aged 45 to 54 it rises to $169,000, and among those 55 to 64 to $213,000. COVID policies helped drive up average U.S. home prices by about 30%, so those figures will have risen since 2019.

But again we are not nearing $1.8 million.

Not even close.

The good news, though, is that you don’t actually need this amount or anything like it to retire.

Naturally if someone hasn’t figured life out by the time they retire, and they still think that buying yet more stuff is the route to happiness, no amount is going to be enough.

How much we’d like and how much we need are very different things.

A $1.8 million balance would buy a 65-year-old couple an immediate annuity paying a guaranteed lifetime income of $9,500 a month, or just over $110,000 a year.

The average Social Security benefit on top of that for a retired couple is just under $3,000 a month, or $36,000 a year. So in total you’d be on about $146,000 a year. What are these people planning to do in retirement?

Even with a 3% annual rise, to account for inflation risk, that annuity will pay out $83,000 a year, and that’s for a couple, not just for one person. The money continues until both of you have gone.

How much do we really need? Well, while acknowledging that each person and each person’s situation is going to be different, let’s do some simple math.

Actual seniors are living on median annual incomes of around $45,000 to $50,000, says the Federal Reserve. And most of them say they are either reasonably satisfied with retirement or actually happy. So, at least, they tell Gallup and the Employee Benefit Research Institute.

Meanwhile, a new survey from Schroders finds that the average person thinks a comfortable retirement can be had on around $5,000 a month, or $60,000 a year.

The average Social Security benefit for a retired couple is $36,000 a year. To bring that income up to $50,000 you’d need an annuity paying $14,000 a year.

Current cost in the annuities market: $225,000.

To bring that up to $60,000 the annuity would cost $385,000.

For $350,000 you can get an income of $18,000 with a 3% annual increase to deal with inflation.

For $800,000 you can double your Social Security income, bringing in another $36,000 a year — with a 3% annual increase to deal with inflation.

The cost of housing is a major component for retirees. No, someone doesn’t have to move to Iowa to be able to retire in comfort. But they can move the dial by cashing in their home in an expensive neighborhood — especially the kind of location they may have moved to for a high-paying job or the best schools — and moving somewhere cheaper. Away from coastal California or the “Acela” corridor in the Northeast, a lot of U.S. homes are really cheap.

Retirement savings generally are grossly inadequate, and many people face genuine hardship in their senior years. And, of course, pretty much everyone could use more money. On the other hand, you can retire in comfort with a lot less than $1.8 million.

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