Rich People Often Underestimate What It Takes To Maintain Their Standard Of Living In Retirement

Feb 22, 2024

You’re rich and you think it’ll always be that way, even after you hang up your work boots (or suit) and ride into the sunset. But retirement life isn’t all it’s cracked up to be for many wealthy people.

According to the Center for Retirement Research at Boston College, more than 25% of all U.S. households believe they’re on track to maintain their standard of living in retirement but are on schedule to fall short.

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The study shows that the wealthy are more likely to underestimate how much money they need to maintain their standard of living in retirement.

In many ways, this is a perception versus reality problem. What rich people perceive to be true — and what is — regarding their finances, can have a massive impact on their futures.

Here are some of the many reasons why rich people often underestimate how much they must save for a comfortable retirement.

As the value of homes increased, many households felt more financially secure without fully accounting for their remaining mortgage debt. This issue is particularly pronounced among high-income families who typically own more valuable properties, leading them to underestimate their housing debt relative to their assets.

The concept of “wealth illusion” can mislead people regarding their defined contribution (DC) plan balances.

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For example, a $100,000 balance may seem sufficient, yet it only translates to about $617 per month in retirement income, a figure that may not meet living expenses.

This misconception, often reinforced by strong market returns, tends to affect low- and middle-income households, making them overly optimistic about their financial readiness for retirement.

Dual-earner households often overlook the need to replace both partners’ incomes in retirement to sustain their lifestyle. Households where only one spouse contributes to a retirement plan are particularly at risk of underestimating their future financial needs.

This risk escalates with higher incomes, as Social Security benefits replace a lesser proportion of pre retirement earnings for wealthier people, contributing to a false sense of financial security.

Regardless of your age, you should always have one eye on retirement. Time has a way of flying by, and if you’re not carefully planning for the future, you could soon find that you don’t have enough money to maintain your standard of living after your working days are over.

Rich or not, there’s never a good reason to underestimate what you’ll need to live well in retirement.

Consulting a financial adviser can provide additional guidance and support for anyone planning for retirement. Financial advisers offer personalized investing strategies, create effective budgets and work toward both short- and long-term financial goals.

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*This information is not financial advice, and personalized guidance from a financial adviser is recommended for making well-informed decisions.

Chris Bibey has written about personal finance and investment for the past 15 years in a variety of publications and for a variety of financial companies. He is not a licensed financial adviser, and the content herein is for information purposes only and is not, and does not constitute or intend to constitute, investment advice or any investment service. While Bibey believes the information contained herein is reliable and derived from reliable sources, there is no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information.

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