The amount of money Americans think they need to retire comfortably hits record high: study

Inflation has crept into every part of Americans’ lives, including how much they now think they need to retire comfortably: a record $1.46 million, a study released on Tuesday said.

That’s a 53% surge since the $951,000 target Americans reported in 2020 and a 15% increase from last year’s $1.27 million, according to Northwestern Mutual’s 2024 Planning & Progress Study which polled 4,588 adults in January.

The jump hasn’t spurred Americans to save more, though. The average amount that U.S. adults have saved for retirement dropped modestly to $88,400 from $89,300 in 2023 but that is more than $10,000 off the five-year peak of $98,800 in 2021, the study said. The dip in savings brings the gap between what people think they need for retirement and what they’ve saved to $1.37 million.

“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. “Inflation is expanding our expectations for retirement savings.”

What we think we need in retirement and what we’ve saved

Every generation shows a large gap between what its members believe they’ll need for a comfortable retirement and the reality of what they have saved as of today, the study showed.

Protect your assets: Best high-yield savings accounts of 2023

◾ Gen Z expects it’ll need $1.63 million for retirement but has only saved $22,800 on average – a $1.61 million gap

◾ Millennials think they’ll need $1.65 million but have only saved $62,600 on average – a $1.59 million gap

◾ Gen X forecasts it’ll need $1.56 million but has saved on average $108,600 – a $1.45 million gap

◾ Boomers predict they'll need $990,000 but they've saved $120,300 on average – an $870,000 gap

Even high-net wealth people registered a wide gap. They expect they’ll need $3.93 million to fund their lifestyle in retirement but on average only have $172,100 saved, the study said.

How do savings tactics differ between generations?

Gen Z thinks the early bird catches the worm. They believe that by starting to save sooner, they’ll be able to retire earlier, the study said.

“Young people today recognize the value of retirement planning and building wealth early on in life and are getting a significant head start over their parents and grandparents,” said Gokhale.

Gen Z has, on average, started saving for retirement at age 22, nearly a decade earlier than the overall average age across generations of 31, the study said. Overall, the average age most people expect to retire is 65.

Boomers said they started saving at age 37, while Millennials began at 27 and Gen X at 31.

Gen Z expects to retire at age 60, a dozen years earlier than Boomers, four years earlier than Millennials and seven years sooner than Gen X.

In addition to saving earlier, Gen Z thinks it will live longer. Three in 10 Gen Zers and Millennials expect to celebrate their centennial birthday. That’s more than the number of Gen Xers (22%) and Boomers (21%) who think they’ll see 100 years, the study said.

Optimism for a long life and fear Social Security may run out are also "pushing up expectations for retirement savings," said Kyle Menke, founder and wealth management adviser with Northwestern Mutual’s Menke Financial. "Living a longer life is wonderful on many levels, but the challenge is to plan for it and pay for it."

Most people forget about taxes

Even though you must pay taxes through death, only 30% of Americans have a plan to minimize the taxes they pay on their retirement savings, the study said.

Never forget to plan around taxes:Tax diversification can help you save. Here's what to consider with your retirement funds.

“Putting money into a 401(k) may not be enough to retire comfortably if the financial plan doesn’t address the impact of taxes on retirement income,” Gokhale said. “Most people don’t realize that their retirement income will likely be taxed at 20% to 30% when they withdraw and spend it. When they recognize the impact, it’s often too late for them to adjust.”

Some top strategies people use to minimize taxes, the study says, include:

◾ Strategically withdrawing money from traditional and Roth accounts to remain in a lower tax bracket. Money from traditional accounts is taxed as income and Roth withdrawals are tax-free.

◾ Making a strategic charitable donation, which is tax-deductible as long as it comes directly from a taxable account.

◾ Using a Health Savings Account (HSA) or other tax-advantaged health care account to pay for medical expenses. Withdrawals for qualified expenses are tax-free.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.