Rethinking Retirement: Why Americans Should Focus on Savings Rate Over Total Savings

April 16, 2024

In recent studies, Americans have expressed a significantly increased expectation for their retirement savings, believing they need about $1.46 million to live comfortably in retirement, a sharp rise from previous figures. According to new research from Northwestern Mutual, this number represents a 53% increase since 2020. Yet, with the average U.S. adult only having $88,400 saved towards retirement and more than half feeling behind in their savings, focusing on such a high target can seem daunting.

John Roland, a certified financial planner at Northwestern Mutual’s Beyond Financial Advisors, emphasizes that this “magic number” should not be the primary focus. “The number isn’t the emphasis,” Roland explains. Instead, he suggests that retirement planning should involve making well-informed decisions about money management in the later stages of life, transitioning from accumulation to distribution of wealth.

Echoing this sentiment, Rita Assaf, vice president of retirement products at Fidelity Investments, points out the importance of a personalized approach to retirement planning. According to Assaf, factors like income replacement, living location, lifestyle, healthcare costs, and longevity are critical in determining the savings needed. “It depends on your situation,” Assaf remarks, underscoring the individuality of retirement planning.

Instead of fixating on a daunting total savings goal, financial experts recommend focusing on savings rates and asset allocation. Fidelity has created a savings framework that encourages saving specific multiples of your salary by certain ages, starting with 15% annual savings at age 25. Vanguard’s research also supports increasing annual retirement savings to 12% and 15%, which can significantly enhance one’s sustainable investment rate.

While the $1.46 million figure might capture headlines, the savings rate genuinely matters in securing a comfortable retirement. Incremental increases, even as small as 1% per year, can compound over time to yield substantial financial benefits. As Roland advises, prioritizing savings over spending can lead to unexpected wealth accumulation, proving that disciplined financial habits are more indicative of future prosperity than any single target number.

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