Many individuals experience significant anxiety regarding their ability to save enough funds for a comfortable retirement. However, recent studies reveal that, despite these fears, a substantial number of people may be in better financial shape than they realize.
A survey conducted in November among 500 employees of private-sector companies on behalf of Principal Financial Group indicates that approximately two-thirds of participants overestimate the amount of money they need to save for retirement, often by a considerable margin. The findings show that 56% of respondents believe they must save at least 30 years’ worth of income before they can retire comfortably.
This figure is nearly three times higher than the recommendations provided by financial experts. Sri Reddy, senior vice president of retirement and income solutions at Principal Financial Group, expresses that it’s not surprising for individuals to hold this misconception about their retirement savings.
Individuals who believe they require 30 years’ worth of income likely think they need sufficient savings to cover each year’s living expenses post-retirement. However, Reddy clarifies that if individuals aim to save 10 times their annual salary, along with Social Security benefits, they can expect to achieve between 75% and 80% of their pre-retirement income. This is contingent upon their understanding of how much they can withdraw safely each year, balancing immediate cash needs with continued savings for years ahead.
Unfortunately, Principal’s survey uncovered another common miscalculation among respondents. More than half of those surveyed believe they can withdraw 10% of their retirement savings each year while maintaining long-term financial stability. This figure is significantly higher than the recommended 4% withdrawal rate advised by many financial professionals. Adhering to a 4% withdrawal strategy ensures that a portion of your retirement principal remains invested, allowing it to generate returns for decades.
Principal’s research indicates that most individuals manage to save approximately 8% of their income annually. Reddy notes that while this is somewhat low, it’s not excessively so. He advises, “Aim to reach at least 10%,” which includes both personal contributions and any employer matching funds.
Peter Gallagher, managing director of Unified Retirement Planning Group, suggests that individuals intending to boost their savings should focus on contributing as much as possible. Many people may find it challenging to max out their contributions—especially since the contribution limit for 401(k) plans for those aged 50 and under is set at $23,500 in 2025, while the IRA limit stands at $7,000.
If these contribution limits appear daunting based on your current income, don’t let that discourage you. Reddy warns that this intimidation can lead to a significant risk: people may become so overwhelmed by the savings goals that they don’t even begin to save. “Saving anything is better than saving nothing,” he asserts.
Furthermore, Reddy points out that there are effective strategies to gradually increase your savings rate without feeling deprived. He recommends that as individuals receive raises in the future, they should consider allocating half of those increases to their savings. “It’s easier to adjust to missing money that you’re not accustomed to receiving,” he explains.
Interestingly, it is possible to save excessively for retirement. The concern lies not in the total amount saved, but in the types of accounts used for saving, as noted by Nicole Garner Scott, a financial advisor with Northwestern Mutual. She emphasizes the importance of considering how and where your retirement savings are allocated.
Traditional retirement accounts offer favorable tax treatment, enabling you to maximize your 401(k) or IRA contributions by deferring taxes until withdrawals are made in retirement. However, a significant drawback is that access to these funds is typically restricted until you reach at least 59½ years of age. If you save too much in these accounts, you may encounter a costly liquidity crisis.
Should you need to access your funds before reaching 60, you will incur an early withdrawal penalty in addition to paying income taxes on the amount taken out. Although borrowing against a 401(k) is an option, this flexibility is not available with an IRA. Moreover, if you lose your job, any borrowed funds from your 401(k) must be repaid within a short timeframe, often 90 days.
Another potential pitfall of over-saving in pre-tax instruments, such as traditional 401(k)s and IRAs, is the risk of unexpectedly large tax bills in your 70s and beyond, which can also affect your heirs, Gallagher warns.
Gallagher observes that many individuals who diligently save throughout their lives often fail to realize when they reach a point in retirement where they can start enjoying the benefits of their hard work. “It can be quite a surprise initially,” he explains. “They often feel as though they haven’t saved enough.”
Due to recent changes enacted by the SECURE Act 2.0, beneficiaries inheriting IRAs from a parent are now required to withdraw all funds within ten years of the parent’s passing. When an adult child inherits a $1 million IRA, this translates to an annual increase of roughly $100,000 to their taxable income over the decade.
“This is a significant change,” Gallagher states.
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