Employees’ ‘Magic Number’ For Retirement Hits All-Time High, But Savings Lag

Employees think they need much more money to have a comfortable retirement than they did just a few years ago. But they are a long, long way off from reaching their goal.

U.S. residents’ “magic number” for retirement has surged to an all-time high—rising much faster than the rate of inflation, which currently hovers just above 3 percent, according to new data this week from Northwestern Mutual. On average, U.S. adults now believe they will need $1.46 million to retire comfortably, a 15 percent jump over the $1.27 million reported last year and a whopping 53 percent surge from the $951,000 target they reported in 2020.

By generation, both Generation Z and Millennials expect to need more than $1.6 million to retire comfortably. High-net-worth individuals—those with more than $1 million in investable assets—said they’ll need nearly $4 million.

Although workers acknowledge they need a greater amount of money saved, actually saving for retirement is another story.

The average amount that U.S. adults have saved for retirement is just $88,400, according to Northwestern Mutual’s survey of 4,588 U.S. adults—slightly lower than the $89,300 in 2023 and much lower than the five-year peak of $98,800 in 2021, according to Northwestern Mutual. It also means there is a $1.37 million gap between the average employee’s retirement goal and current savings. Baby Boomers on average have $120,300 saved for retirement, Gen X employees have about $108,600 saved, Millennials have $62,600 and Gen Z has $22,800.

“People’s magic number to retire comfortably has exploded to an all-time high, and the gap between their goals and progress has never been wider,” said Aditi Javeri Gokhale, chief strategy officer, president of retail investments and head of institutional investments at Northwestern Mutual.

That’s in part due to a persistently high cost of living and soaring financial stress, which have taken their toll on employees and caused them to feel like they need to sock away more money for their post-work years, she said. Although inflation has cooled in recent months, the damage has been done.

“Inflation is expanding our expectations for retirement savings and putting the pressure on to plan and stay disciplined,” Gokhale said.

John Lowell, a partner with consulting firm October Three Consulting in Woodstock, Ga., said employees’ debt and competing financial priorities are also playing a role.

“By all appearances, while American workers are starting to make use of their retirement plans at earlier ages, too many do not seem to be using them as retirement plans. Rather, they are too often simply another source of funds that is part of a vicious cycle,” he said, explaining that credit card debt and other consumer debt has increased rapidly as the amounts of retirement savings have stagnated and even declined.

“Stories abound of people of all generations gutting their retirement savings to service their consumer debt,” he said. “Sometimes, in order to do this, they change jobs and they do so for the sole purpose of accessing their retirement savings immediately.”

Part of a Bigger Trend

The data from Northwestern Mutual comes on the heels of other reports pointing out retirement woes and discrepancies—and that employees could use more help on the issue from their employers.

In 2023, workers’ and retirees’ confidence in having enough money to live comfortably throughout retirement fell to the lowest rate since the Great Recession, dropping to 64 percent from 73 percent in 2022 among workers and to 73 percent from 77 percent in 2022 among retirees, according to data from the Employee Benefit Research Institute (EBRI) and Greenwald Research.

Sky-high inflation, the pandemic and other issues have caused a significant number of employees to turn to their 401(k)s for funds, with nearly a third of workers (30 percent) tapping into their retirement savings over the past 12 months to pay for short-term expenses, according to a December Betterment at Work survey.

And another EBRI report indicated that health care in retirement is a growing issue, because just 3 percent of private-sector companies were still offering health care plans that supplement Medicare for eligible retirees in 2022.

Lowell said that in order to reach the new magic number, those who start saving for retirement at young ages will need to save, on average, around 15 percent of their pay annually toward retirement. Even the 15 percent figure is a moving target, though, because other factors, such as starting to save later or temporary reductions or cessations in savings, can change savings plans.

For employers, the trend might be a sign that they should “spend more and spend smarter on retirement benefits to keep employees at your company and keep them focused on work,” Lowell said.

“Employees tend to live at levels related to their available income. In other words, those who live 5 percent below their means tend to stay at that level, while those who live 10 percent above their means accumulate more and more debt. Forcing money into true retirement benefits can thus be an answer for many employers,” he explained. “When companies compare the costs of unwanted quitting and quiet quitting to the costs of helping to ensure financial wellness to their employees, wellness will tend to win. And to ensure that long-term financial wellness, retirement benefits need to be allocated specifically to retirement.”