New Study Shows This Group Is More Likely to Overestimate Their Retirement Savings

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Are you overestimating your retirement savings? A new study shows you might be. Here’s what you can do to avoid this trap. 

Many Americans believe they’re on track to maintain their standard of living during their golden years. Unfortunately, more than one-quarter of U.S. households might be overestimating their retirement savings. This new research comes from the Center for Retirement Research at Boston College, and it reveals that the affluent are more likely to hold this mistaken belief. Here’s why.

Understanding the wealth illusion

Despite their wealth, the rich are often more likely to underestimate risk than middle and lower earners. This is due in part to a “wealth illusion” created by the booming stock and housing markets, which disproportionately benefit affluent households that own these financial assets.

Rich people tend to overestimate their retirement savings because they have a false sense of security regarding their investment portfolios. Wealthy individuals assume their investments will continue to grow in value at the same pace, even during times of economic downturn.

However, the truth is that even the most well-diversified portfolio is subject to market risk, which can wipe out years of savings. Market fluctuations can affect one’s retirement accounts, and by relying too heavily on current stock or property values, retirees may find themselves with less wealth than they thought.

High-income households may be incorrectly estimating their future retirement income based on the current state of their assets, which may not be sustainable in the long run.

Why the wealthy are prone to downplay risks

According to the study, 32% of high-income households are “not worried enough” about their retirement risk. This unfortunately leads them to believe they’ll be able to maintain their standard of living after they stop working when, in reality, they’re at risk of falling short.

In addition to the “wealth illusion,” a significant number of affluent households have a large amount of housing debt relative to their home equity, three times more than middle and lower earners. Social Security also replaces a smaller portion of annual income for wealthy households, meaning they must save more money to maintain their standard of living.

Another reason why rich people may overestimate their retirement savings is because they underestimate their expenses in retirement. While it’s true that many expenses, such as mortgage payments, may decrease in retirement, there are also many expenses that can increase, such as healthcare, travel, and their kids’ education costs.

So, while the rich may have a lot of money saved for retirement, they may not have accounted for all of the expenses they’ll face during their golden years.

Tips to avoid overestimating your retirement savings

Retirees and future retirees should take a proactive approach to manage their retirement savings. The first step is to review your financial plan and make adjustments if necessary.

Experts recommend spending no more than 3.5% to 4% of retirement savings per year, and this may need to be adjusted depending on one’s situation. Additionally, consider reducing discretionary spending, such as eating out or expensive car payments, to bolster retirement accounts.

For those who are approaching retirement but have inadequate savings, the best option is to create a plan to supplement income in retirement. This may involve working longer than anticipated or taking advantage of more significant Social Security benefits by delaying retirement until age 70.

Planning for medical costs and long-term healthcare is also essential, as these can be significant expenses in retirement. Another way to ensure you’re on track to meet your retirement savings goal is to use a retirement calculator tool. These tools take into account factors such as your current age, retirement age, and retirement income goal to help you calculate how much you’ll need to save to achieve your objective. This can help you get a better understanding of where you currently stand and what you need to do to stay on track.

It is essential to keep one’s retirement goals in perspective and not let the “wealth illusion” distract you from meeting your financial goals. Retirement is about more than just financial security — it’s about creating a life of fulfillment and purpose. Wealth may be a factor, but it is not the only consideration. Retirees should focus on spending time with the people they love, experiences, and living a life of joy and meaning.

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