CAPITAL IDEAS: Americans expect they’ll need $1.25 million to retire (2024)

For most people, a $1.25 million investment portfolio sounds unachievable. And they’re probably right. The primary savings source for Americans is the company 401(k) plan. According to the “How America Saves 2022” report, the average 401(k) balance for those age 65 or higher is $280,000. Some significant outliers skew the average, so the median of $87,700 may be more meaningful.

Nonetheless, the “2022 Planning & Progress Study,” conducted by The Harris Poll found that U.S. adults believe they will need $1.25 million to retire comfortably. This finding reminds me of a passage in my book, “Don’t Run Out of Money in Retirement: How to increase income, avoid taxes, and keep more of what is yours“:

“Not all that long ago, you might have been surprised to find out that there was a millionaire next door. The word ‘millionaire’ once conjured images of top hats and money bags. Today they wear jeans and T-shirts, and they are everywhere. You well might be one yourself, but does that mean you are set for life? Will you have enough money to see you through in comfort for the rest of your days?

“You may have heard of the 4 percent rule, which had become a rule of thumb in retirement planning in the mid-1990s. It was advanced by William Bengen, a California advisor who based the formula on his research of historic market behavior. The rule is that if you spent 4 percent of your portfolio annually, you’d be unlikely to run out of money for thirty years. The portfolio should be diversified and invested relatively with a mix of stocks and bonds.

“Now let’s look at how those numbers play out if you are retiring with a $1 million portfolio. Each year, you can withdraw $40,000, with an inflation adjustment. Is that the kind of income you were anticipating when you pictured yourself as a millionaire retiree? It amounts to about what you would earn working full-time for a year at $20 an hour. Better than minimum wage, yes, but not by all that much anymore … Bengen revised his formula in 2006, raising the rate to 4.5 percent.

“I’m not discounting the accomplishment of reaching the millionaire threshold. Most people don’t come close to saving that much. I’m just suggesting that you should realistically assess what a million dollars can do for you when invested for a retirement income stream. Most prospective retirees are looking for a quarter century or more of comfortable living ahead of them, but comfort is relative. An annual income stream of $40,000 on top of your Social Security checks might be all you expect and want. It all depends on the standard of living you envision for your retirement. You might not need a million to feel like a million bucks. Or you might need a whole lot more.

“I have had people come to our office with just one question: ‘Can I retire today?’ Literally, today. That was their plan, but they figured they should get an affirmation before giving their two-week notice and walking into the unknown. Some even know full well that they are in pretty good shape but want an affirmation that is more emotional than mathematical.Either way, to do my job, I need to see how they are planning to pay the bills and what those bills might be. Do they have sufficient income to cover their needs? How about to pay for all their wants and maybe a wish or two?”

Retirees frequently overestimate their income and underestimate their retirement expenses. As the owner of Berkshire Money Management, one of my first concerns for retirees is whether they can afford health care. According to Fidelity Investments, “an average retired couple age 65 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement.”

You can find essential Medicare information in “Don’t Run Out of Money in Retirement”; however, it is difficult for many people to navigate the process of maximizing Medicare benefits. A representative for the Fidelity study notes, “Many people assume Medicare will cover all your health care costs in retirement, but it doesn’t. So, you should carefully weigh all your options.”

Getting the most out of Medicare is a specialty in itself. Many people are going to need more than a website address, a YouTube tutorial, and a dog-eared copy of “Medicare for Dummies” to get all they deserve. And then “deserve” might later need to be modified to “need”—whether it’s the need of cost savings or coverage amplification. Whether you are a do-it-yourselfer, an advisor taking a stab at it, or someone who wrote a book on it, it’s not likely Medicare will cover the bulk of healthcare costs in retirement.

The point is, even if you’ve achieved a lofty retirement savings of $1.25 million, you may not retire as comfortably as you’d expect. It’s no wonder 43 percent of those in the “Planning & Progress Study” said they do not foresee being financially prepared for retirement. That may be why the report found that Americans now plan on working longer, retiring, on average, at age 64, compared to 62.6 last year.

One-third of the people in the study predict a chance of running out of money in retirement. Yet, the report found that only 36 percent of those people have proactively addressed that concern. The study finds, “More than six in 10 Americans (62 percent) say their financial planning needs improvement, yet only a third (35 percent) seek the help of a financial advisor.” I’m surprised that so many people use financial advisors, given the widespread perception that the primary value is investment selection, as opposed to other financial planning tools.

The “2022 Planning & Progress Study” found that “people contending with financial uncertainty says it is impacting their health, job performance, relationships and more. They report that financial uncertainty leads to the following issues at least once a month:

• “Makes them feel depressed – 36 percent
• “Keeps them up at night – 34 percent
• “Impacts their relationship with their spouse/partner – 28 percent
• “Causes them to miss out on social events and opportunities – 28 percent
• “Creates issues with friends or family (other than spouse/partner) – 26 percent
• “Makes them physically ill – 24 percent
• “Impacts their job performance – 24 percent”

There is a cost to avoiding financial planning that extends beyond the size of your investment portfolio.

The Mullet Trade

Earnings season has officially started. Wall Street analysts expect that fourth quarter 2022 earnings for companies in the S&P 500 will decline by 4.1 percent compared to last year, according to FactSet. That is one heck of a swing from the 31 percent growth rate in the fourth quarter of 2021.

Those same analysts expect earnings for all of 2023 to rise 4.7 percent in 2023, according to FactSet.

If earnings were to rise 4.7 percent in 2023, the U.S. economy would have avoided a recession. Still, I’d expect inflation to come down meaningfully (the math supports my expectation, even if it doesn’t feel that way to shoppers). That’s a recipe for big gains in the stock market.

It will take a year to find out, but if any readers of “Capital Ideas” want to take the “over” bet, I’ll take the “under.” If you bet S&P 500 company earnings come in at 4.7 percent or over for 2023, I’ll bet they’ll come in under. The loser pays to the winner’s charity of choice.

I may have some comers because it would be for charity. But I’m betting that the typical reader of “Capital Ideas” knows that’s a sucker’s bet. The Federal Reserve interest rate hikes to lower inflation will make it challenging for companies to increase profits this year.

I suspect that the stock market has yet to digest the trajectory of corporate profits fully. Brent Thill of Jefferies coined the best description of what I anticipate for the stock market in 2023. Thill calls it the “Mullet Trade,” referring to the technology sector’s layoff pains. The technology industry saw more than 97,000 layoffs in 2022, according to Challenger, Gray & Christmas.

While that was the second-lowest recorded number of layoffs since being tracked in 1993, it led all other sectors. Thill explained, “we believe in the mullet trade … where it’s kind of business in the front, party in back … the front half is going to be a lot of pain and [I would] use as an opportunity to buy into the pain [before reaching] a flowy, long, exciting” rally in the back half of the year.

It’s a cute visual representation of what could happen to the U.S. stock market (especially technology stocks) in 2023. The Mullet Trade might see stock prices decline or grind sideways as companies right-size their staffing levels and scale back on expansion projects. They’ll likely find a bottom around the second or third quarter, reaching a bottom to a long and painful bear market.

Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.