You don’t need to be a millionaire to retire

Seniors aren’t running out of money—spending on gifts and donations increases with age. Retirees simply spend less on themselves than financial planners assume.
Seniors aren’t running out of money—spending on gifts and donations increases with age. Retirees simply spend less on themselves than financial planners assume.

Summary

Among seniors with $50,000 to $99,999 in savings, 86% were doing OK or living comfortably.

According to a new survey from Northwestern Mutual, the average American thinks he’ll need $1.46 million in savings to be financially secure in old age. If that were true, it’d be bad news. As USA Today recently reported, the average U.S. adult has saved only $88,400 for retirement.

The good news: The survey results are implausible. So are even less audacious goals, such as Fidelity’s rule of thumb that households should amass savings equal to 10 times their final salary before retiring. These theoretical figures serve investment firms that have a product to sell, as well as the media, for which bad news makes good headlines. They also serve politicians who distrust private retirement savings.

Hard data on retirees, however, show it takes nothing like those levels of savings to be financially secure in old age. The Federal Reserve’s Survey of Household Economics and Decisionmaking asks U.S. households, “Overall, which one of the following best describes how well you are managing financially?" 

Among respondents 65 to 74 between 2019 and 2022, 3% said they were “finding it difficult to get by," 12% were “just getting by," 37% were “doing OK" and 49% were “living comfortably." Most retirees report that they’re doing fine in other surveys, too.

The Fed asks another useful question: “Approximately how much do you currently have saved for retirement?" It provides categories ranging from “less than $10,000" to “more than $1 million."

Only 19% of retirees reported having less than $10,000 in savings, a stark rebuttal to Sen. Bernie Sanders (I., Vt.), who claims that “almost 45% of older Americans between the ages of 55 and 64 have no savings at all and no idea how they will be able to retire with any shred of dignity or respect." 

Nearly 3 out of 4 of those who were “finding it difficult to get by" had less than $10,000 in savings, and a slight majority of retirees at this asset level (52%) said they were doing OK or living comfortably.

Of the seniors with more than $10,000 in retirement savings, less than 1% said they were finding it hard to get by, while 93% reported they were doing OK or living comfortably. Among the subgroup with $50,000 to $99,999 in savings—a small fraction of what retirees are told they need—3% found it hard to get by, 11% were just getting by, and 86% were either doing OK or living comfortably.

How much does a retiree need to feel financially secure? In the Fed survey, the median 65- to 74-year-old who reported “doing OK" or “living comfortably" had between $50,000 and $99,999 in savings. The median retiree who reported “living comfortably" had $100,000 to $249,000. It’s impossible to find any evidence that seniors need even a fraction of $1.46 million in savings to be financially secure.

Why, then, do seniors report such high levels of security with seemingly paltry levels of savings? One reason is that Social Security benefits are more generous than people think. An average couple retiring in 2022 received total annual benefits of nearly $46,000, up from around $34,600 (in today’s dollars) in 2000. 

While hardly extravagant, a typical couple can expect an income more than twice the elderly poverty threshold before they touch a penny of their own savings.

Conventional financial planning also overstates the income seniors need. That owes partly to planners assuming that seniors require the same amount of money throughout retirement. Yet as economists Michael Hurd and Susanne Rohwedder of the Rand Corp. have shown, average household spending drops by roughly 40% from age 65 to 90. 

Seniors aren’t running out of money—spending on gifts and donations increases with age. Retirees simply spend less on themselves than financial planners assume.

Planners likewise forget that much of adults’ preretirement income is spent on their children. The U.S. estimatesthat a couple earning roughly $83,000 with two children spends more than $26,000 annually providing food, housing, healthcare and other needs for their children. 

That’s money parents can’t spend on themselves. Of the income they could devote to their own needs, Social Security will replace around 60%. The upshot is that parents need less savings on top of Social Security than one might think.

America faces retirement challenges as life spans increase and Social Security’s trust funds run dry. Scaring people with unrealistic retirement-savings goals isn’t part of the solution.

Mr. Biggs is a senior fellow at the American Enterprise Institute.

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