Dear Advisors, Four in 10 Say They Need $1 Million To Retire Happy

Four in 10 Americans say they need $1 million to live in retirement.

Here’s an “uphill climb” in the making for financial specialists.

About 40 percent of U.S. career professionals estimate they’ll need $1 million to “retire comfortably,” according to a new Employee Benefits Research Institute study.

Yet the average 401(k) balance at Fidelity-administered retirement plans is only $92,500 in 2017, according to the company. (Although that figure is up $4,300 from 2016.)

While incomes vary, and 401(k)s aren’t the only source of retirement income, financial advisors are on the hot spot with many clients who don’t have near $1 million in their retirement savings.

That leaves money managers playing either the “blame game” or the “reduced expectations” game (or maybe both) with their clients, who don’t yet see the handwriting on the wall.

“Right now, 52 percent of American households are at risk of not being able to maintain their standard of living in retirement, according to the Center for Retirement Research at Boston College,” said Pamela Yellen, financial expert and two-time New York Times best-selling author.

That’s a big problem, as demographic and financial problems continue to mount for retirement-minded Americans, Yellen added.

“First, people continue to live longer, but aren't working longer,” noted Yellen. “According to the Social Security Administration, 25 percent of people turning 65 today will live past 90, and one out of ten will live past 95, yet most financial planners base their projections of how much money you'll need on your living to age 85 or so.

“What if you're one of the lucky ones who hangs on until 100 or longer? And just how lucky will you feel if you can't provide for yourself during those final years?” Yellen said. “The only way out of that box is to assume you’ll live to age 100, and use that as a timeline in determining how long your money will need to last you.”

No Surprise

A big part of the problem, and an issue that requires addressing by the money management sector, is that many otherwise savvy career professionals aren’t focused on making up any retirement savings ground.

“Having worked in the retirement field for more years than I care to remember now, the EBRI study does not surprise me at all,” said Collin Plume, president of Noble Gold Investments in Los Angeles.

In Plume’s experience very few people, including “highly intelligent” career professionals -- such as surgeons, lawyers, even financial professionals like insurance brokers and traders -- fully understand the way pensions and defined contribution plans really work.

“These people think that it’s the job of the fund managers to aim their pension funds at the levels that are expected,” Plume said. “It always comes as a shock, when people realize that it is, ultimately, their responsibility to make sure that their funding is sufficient for their needs.”

The “retirement savings gap” problem is compounded by the inability of savers (especially younger ones) to leverage the asset growth benefits of compound interest.

“Based on my experience as a college business professor, a great many investors don't comprehend the earning power of compound interest,” said Timothy Wiedman, a finance professor at Doane College in Lincoln, Neb.

Younger investors wouldn’t have major retirement savings problems in middle age if they realized that investing in relatively safe, low-cost stock index funds will allow compound interest to do most of the work.

“If younger workers just did that fact, most could sock away a million-dollar nest-egg prior to retirement,” Wiedman pointed out.

For example, if a 23-year-old fresh out of college puts $3,000 per year into a Roth IRA (Individual Retirement Account) that earns a 7.8 percent average annual return, 44 years later at retirement, that $132,000 of invested funds will have grown to $1,009,275, Wiedman calculated.

“Plus, since those funds are in a Roth IRA, income taxes aren’t an issue,” he added.

'The $1 Million Mantra'

For those tens of millions of working Americans who are well past the age of 23, making up ground on lax retirement savings – even with stellar financial advisory help – is tough sledding.

“The $1 million mantra has certainly gained a lot of traction over the past decade, but the reality is that retirement saving is a lot more personal than that,” said Ryan Farnung, a retirement specialist with GPS Financial Advisors in Pittsford, N.Y.

As retirement grows nearer, savers have to look at making ends meet via a variety of strategies, including personal savings, Social Security benefits, any pension income they may have, and expenses or loan payments that they will no longer have to incur/service, Farnung added.

“On the flip side, there are many future retirees who will need much more than $1 million in order to maintain their current lifestyle,” he said.

The retirement problem not only isn’t going away, it’s looming larger over the U.S. financial landscape. With so many workers unmindful, at least, of the issue, it’s up to financial advisors to take the reins, and steer workers back on track toward a stable retirement.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected]