How much does it cost to retire? By their own estimates, Americans don't have it

How much does a comfortable retirement cost? A new study got Americans' answers — and found that most of them hadn't saved even half what's needed to maintain their standards of living.

On average, U.S. workers believe they'll need more than $1 million in savings to leave the workforce in comfort, according to a survey by Schroders, a British investment firm, in partnership with the research group 8 Acre Perspective. After questioning 2,000 working Americans in February and March, the study found that those aged 45 and older thought they'd need $1.1 million, while those aged 27 to 44 set the bar even higher, at $1.3 million.

But few of these respondents were anywhere close to meeting these goals. Only 21% of the 45-plus cohort expected to reach even $1 million. And more than half — 59% — said they were on track to save less than $500,000 by the time they retired.

The numbers for millennials weren't much better. Just 29% of the younger group said they'd reach $1 million by retirement age, and 49% expected to save less than $500,000.

Perhaps most concerning of all, few of those closest to retirement felt they were ready. Less than a quarter — 24% — of workers aged 60 to 67 believed they had enough savings.

"What we're seeing here is that not enough people have started a plan and started it early enough," said Joel Schiffman, the head of strategic partnerships at Schroders. "Without a plan, you lack that continuity of being able to grow your assets over a longer period of time."

Schroders is far from the only researcher to reach this conclusion. Last month, a Fidelity Investments study found that the average American will only have 78% of the income they'll need in their post-work years — down from 83% in 2020. Last year, the personal finance website Bankrate found that at least 55% of Americans were falling short on their retirement savings. And according to the Federal Reserve, 26% of U.S. workers in 2021 had no retirement savings at all.

Why are Americans falling so far behind? Part of the problem, Schiffman said, is cash. Schroders found that, on average, American workers are devoting about a third of their retirement assets to cash savings — 33% for millennials, and 29% for those 45 and older. Schiffman believes that's a mistake.

"You're not going to grow assets over time sitting in cash," he said.

But to many Americans, the alternatives have looked even riskier. Two-thirds of older workers and 62% of millennials said they kept these cash balances because they feared losing money in the stock market. After a brutal year for equities — the S&P 500 fell 20% in 2022 — such fears are not uncommon.

In addition, the study's respondents may have actually underestimated how much they'll need in retirement. Financial advisers are typically reluctant to set a savings benchmark for all Americans, arguing that there is no "one size fits all" number. But when presented with the Schroders estimates — $1.1 million and $1.3 million — many said this was too little.

"Three million dollars is the goal for a number of our clients," said Tom Balcom, the founder of 1650 Wealth Management in Lauderdale-By-The-Sea, Florida. "Assuming the '4% rule' is in effect, this figure will provide clients with $10,000 per month or $120,000 per year." 

(The 4% rule says that retirees should aim to withdraw 4% of their savings each year, to ensure they last into old age.)

Others said the estimates failed to account for rising prices.

"If we factor in 3% annual inflation on the spending, they would need a portfolio beyond $1.1 million," said Jack Riashi, a certified financial planner at Bloom Advisors in Farmington Hills, Michigan. "The inflation factor is where most people tend to underestimate their portfolio asset requirement."

Numerous others responded with a favorite phrase among wealth managers: It depends.

"The amount needed to retire comfortably is completely dependent on the situation," said Erik Baskin, the founder of Baskin Financial Planning in Dayton, Ohio. "Some of the main factors are lifestyle, expected lifespan and risk tolerance. One million dollars for one family might be plenty, while that might not even last another family 10 years."

Many leading financial firms agree with this approach. Fidelity, for example, offers guidelines for retirement savings not as a dollar amount, but in relation to the saver's age and income. The firm recommends saving "1x your salary by 30, 3x by 40," and so on until reaching "10x by 67."

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But this is easier said than done, especially because Americans frequently underestimate the costs of retired life. Forty percent of retired baby boomers, for example, have spent more on travel than they anticipated, according to the financial services firm Capital Group. And medical expenses can explode in old age — the average 65-year-old couple will need $315,000 for healthcare over the course of their retirement, according to one Fidelity study.

How can Americans get ahead of these costs? Schiffman recommended a number of steps, including working with a financial adviser, maximizing any employer match on a 401(k) (if available) and investing assets rather than leaving them in cash. Most of all, he urged working Americans to form a strategy early and then stick to it.

"First and foremost, it starts with developing a plan," Schiffman said. "It doesn't have to be a comprehensive plan, but you have to start someplace."