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How Much You Think You Need in Retirement vs. How Much You Really Need

10/11/2023 Written by: Kristine Simmons

When it comes to packing for a trip, you could be one of two people. A minimalist fits everything they need for a two-week vacation into a small carry-on or backpack. The overpacker who needs two or even three full-size suitcases of everything they own.

It's no fun having to lug around extra luggage on your vacation. Not to mention the wait at the baggage carousel or the added stress when your checked luggage gets lost. On top of this, you feel silly when you get back home and unpack all the things you ultimately didn't need to bring.

So why are we tempted to bring along too much? Psychologists say that overpacking is an emotional reaction to going someplace new. When a destination is unfamiliar, we want to bring more of the familiar things that make us comfortable.1 The reasons to bring along as much as you can are endless. What if it turns cold and rainy? What if the hotel doesn't have a hair dryer? What if I don't like any of the food?

On the other hand, when traveling to a familiar destination, you can confidently pack just the essentials.

Retirement is like a destination you've never been to before. So, it's natural that the emotions that cause you to want to overpack can also skew your estimate of how much money you will need in your post-work years. Bloomberg asked investors from around the globe how much they would need to retire comfortably. The majority of respondents in North America estimated they would need to amass between $3 million and $5 million.2

Ben Carlson, a financial analyst and blogger, has two interesting observations on this study. The first is how unrealistic those numbers are for average savers. Only 4.4% of U.S. households have $3 million or more in assets. The median net worth in America is just over $121,000.3

Carlson’s second observation is that people tend to overestimate how much money they will need in retirement. Carlson cites a report from EBRI that studied how much of their nest egg Americans tend to spend in their first 20 years of retirement. It found that not only did most people spend less than you'd think, but that those with more money spent a smaller percentage of their savings. For example, retirees with half a million or more before retirement spent down less than 12% of their money.

Uncertainty about what lies ahead in retirement can lead you to financially "overpack." Or at least vastly overestimate what you will need. If it's a number you have no realistic chance of hitting, it can discourage you from trying at all.

We can help you create a flexible plan that takes into account your future needs and your current ability to save. Having a familiar and tangible plan can help you feel confident that a fully funded retirement is within reach.


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