The number of 401(k) accounts with balances of $1 million or greater rose to 224,000 in the second quarter of 2020, according to Fidelity Investments. That was a 49 percent jump from Q1, and the number of “IRA millionaires” also increased markedly last quarter. Although encouraging, such individuals should not stop saving because $1 million is not the substantial sum of money that it once was, and many Americans may be shocked by just how quickly they can go through such a nest egg in retirement.
For example, an updated analysis by GoBankingRates estimated the average annual expenditures for people age 65 and older in each state and found that the regional differences can be significant. California, for instance, is the most expensive state in the continental U.S. for retirees, with annual outlays eroding $1 million in just 14 years and 3 months. Mississippi can be found at the other end of the spectrum, where a million dollars will fund an individual’s retirement for a little over 23 years. Perhaps a bigger takeaway is that both of those estimates are shorter in duration than when this same analysis was conducted just a few years ago, meaning that across the board retirement has become more expensive. What is worse is that these challenges are not going to get any easier because medical innovations are enabling people to live longer than ever before.
Rising longevity is of course preferred to the alternative but it also means extra years of retirement to fund. On the bright side, more Americans are becoming aware of just how expensive retirement may be. Indeed, 401(k) participants on average anticipate needing at least $1.9 million in savings in order to achieve a comfortable and financially secure retirement, according to a new Charles Schwab survey. That is a 12 percent increase from 2019, and more than a third of respondents reported that they feel it is “very likely” they will hit their savings target. Some of this optimism is likely related to the roughly one in five 401(k) participants who said they plan on delaying retirement. Such a strategy can provide more time to contribute to these tax-advantaged savings vehicles, as well as a potentially large boost to one’s Social Security benefit.
Additional evidence that many Americans remain on track to achieve their retirement goals can be found in a new Principal Financial Group study. Specifically, despite the economic disruptions caused by the coronavirus and related containment efforts, PFG reported that it has still seen a large number of Gen-X, Gen-Y ,and Gen-Z “super savers,” i.e. retirement plan participants saving 90 percent or more of the IRS maximum or at least 15 percent of their income for retirement. The report’s authors added that “these savers favor long-term sacrifices over short-term cuts to their daily expenses to max out their retirement contributions,” and recommended that “for folks who are looking to boost their savings, it’s OK to start with small, positive choices that begin to snowball into a more substantial nest egg.”
Sources: Fidelity Investments, IBD, GoBankingRates, Charles Schwab, PFG