‘Magic number’ for a comfortable retirement surges upward

Americans’ “magic number” for a comfortable retirement has reached an all-time high of $1.46 million, rising much faster than the rate of inflation and swelling more than 50% since the pandemic began. Over a five-year period, that magic number has jumped by a whopping 53% from the $951,000 target that Americans reported in 2020.

These are among the latest findings from Northwestern Mutual’s 2024 Planning & Progress Study, the research series that explores Americans’ attitudes, behaviors and perspectives across a broad set of issues impacting their long-term financial security.

Additional survey findings

The magic number for a comfortable retirement — $1.46 million — is a 15% increase over the $1.27 million reported last year, and greatly exceeds today’s inflation rate, which hovers between 2% and 3%, said Erik Stephens, CEO of NOVA Capital, Northwestern Mutual. The study also found generational differences, he noted. For example, many young people today recognize the value of retirement planning and building wealth early on, and they appear to be getting a significant and faster head start than their parents and grandparents did.

As Stephens pointed out, the average age when Americans started saving for retirement is 31, but for Generation Z, it’s 22. This average age is also much earlier than it is for baby boomers, who, on average, started at age 37. Meanwhile, only half of boomers and Generation X believe they’ll be financially ready to retire when the time comes, and they have to think about how they’ll pay themselves in retirement, he added.

Why the magic number has risen

There are several reasons why the amount for a comfortable retirement has risen so high so quickly, explained Stephens. “One of them is consumer sentiment,” he said. “The recent experience with inflation is expanding people’s expectations for the cost of everything, including a comfortable retirement. As we often say, in 2023, the soaring cost of eggs symbolized inflation in America. Today, it’s nest eggs.”

In addition, Stephens said, “Our research shows that people plan to live longer in retirement and in general, which means they expect to need more money. Interestingly, younger people feel like they’ll need well beyond the $1.46 million magic number — as much as $200,000 more.”

Finally, Stephens added, people are worried about the future of Social Security after reading and hearing about it in the news. “If the Social Security trust fund reserves run out of money by 2033 — as experts predict — then people may have to shoulder more of the financial burden,” he said. “It’s especially concerning to those who have not had access to a pension plan. No doubt, all these considerations are putting on the pressure to plan and stay disciplined.”

What it means for financial professionals

For a financial professional, knowing that younger people are more attuned to retirement planning at an earlier age can make for easier conversations. It also can make it more likely that a client will stick to a plan, added Stephens, as he explained some of the implications of the survey’s findings for financial professionals. “For those nearing retirement, the conversations can be more challenging for those who may be unprepared, but that’s where a professional’s expertise in either saving or strategically spending resources can be invaluable,” he added.

It’s also important for a financial professional to explain that everyone’s magic number is different, depending on unique circumstances. Some people may need to save more, others less. “In any case,” Stephens said, “done well, a comprehensive plan can preserve thousands of dollars for the golden years.”

Hallmarks of a plan done well

So, what are the hallmarks of a plan done well? “A comprehensive financial plan must be tailored to the individual,” Stephens said. “Everyone has unique hopes, expectations and challenges that the plan must address. It’s critical for the plan to meet today’s needs and the needs of tomorrow — solid enough to meet defined goals, but flexible enough to change as an individual’s circumstances change. A strategy that increases wealth while also mitigating risk — including life insurance — is ideal.”

In addition, Stephens said, a strong personal connection between the financial professional and their client is key to any plan’s success. “That’s because even the best plan won’t work if the client is not brought in on the approach or is willing and able to do the work needed over time,” he said.

Minimizing taxes on retirement savings

The survey also said that only three in 10 (30%) Americans have a plan to minimize the taxes they pay on their retirement savings. Among them, the top 10 strategies employed are:

1. Making withdrawals strategically from traditional and Roth accounts to remain in a lower tax bracket (32%).

2. Using a mix of traditional and Roth retirement accounts (30%).

3. Making strategic charitable donations (24%).

4. Using a health savings account or other tax-advantaged health care account (23%).

5. Using products such as permanent life insurance or annuities for the tax benefits (22%).

6. Making Roth conversions prior to taking required minimum distributions or Social Security (19%).

7. Using qualified charitable distributions from an individual retirement account (17%).

8. Making contributions to other tax-advantaged accounts such as a 529 savings plan (14%).

9. Using the basis paid into the cash value of permanent life insurance to remain in a lower tax bracket (13%).

10. Taking advantage of a qualified longevity annuity contract to set aside funds for later in retirement (13%).

When asked to share additional strategies for minimizing taxes on retirement savings, Stephens first pointed out that it is always important to consult a tax professional to discuss any tax-related matters. 

“That said,” he added, “we know that only 30% of Americans have a plan to minimize the taxes they pay on their retirement savings. We also know that putting money into a 401(k) may not be enough to retire comfortably if the plan doesn’t address the impact of taxes on retirement income. Most people don’t realize that their retirement income will likely be taxed at 30% when they withdraw and spend it. When they recognize the impact, it’s often too late for them to adjust.”

One strategy is “deduction bunching,” Stephens added. “In a perfect world, it would be more tax efficient to gift appreciated securities than cash to the charity or organization of your choice. By doing so, you may be able to avoid paying the capital gains. You could then use that cash to repurchase the securities at the new market price. If cash flow permits, you could deduction bunch these by giving multiple years of appreciated securities to a donor-advised fund in a single year. This may allow you to take a larger itemized deduction in the year in which the gift was made, taking the standard deductions in the alternate years.”

Other ideas shared by Stephens:

• Harvesting long-term capital gains if you are in a low tax bracket.

• Placing favorable assets in nonqualified accounts, and placing others that produce income in IRAs or a Roth IRA.

• “Cross billing” a Roth IRA — in other words, paying for IRA fees from taxable accounts.

“A comprehensive financial plan can help people get to and through retirement by minimizing exposure and preventing anyone from paying more in taxes than they should — potentially preserving thousands of dollars in their nest eggs,” Stephens said