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A recent study shows 28% of U.S. households think they’re on track for retirement but are actually at risk of falling short. Extremely surprising: High-income households are most likely to fall into this trap.

The Center for Retirement Research at Boston College led the study based on data presented in the National Retirement Risk Index (NRRI). The authors found that 32% of high-income households (married households earning $248,000 or more) are “not worried enough” about their retirement risk, compared to 26% of low- and middle-income earners.

Regardless of income level, several risks are at play for all retirement savers. For instance, we’re living longer, and education and healthcare costs have skyrocketed. But high-income earners can suffer from overconfidence or a “wealth illusion” that can be uniquely damaging, according to the study authors.

As the U.S. Government Accountability Office confirms, households with retirement savings generally have other resources to draw on, too. Affluent families are likely to rely on other forms of savings, property, assets, and investments to generate income in retirement, which is inherently risky.

“Conceptually, households that were overly optimistic about the economic recovery or overestimated how much income their assets could provide may be more likely to be ‘not worried enough.’ Their overconfidence may lead them to underestimate possible risks,” the study concludes.

Specifically, the study found that the “wealth illusion” as it relates to retirement savings can mainly be attributed to the following risks:

  • Comfort in a strong housing market when, in reality, a debt-to-asset ratio may be at play. This relationship “is especially strong for high-income households, who tend to own more expensive homes.”
  • Having an unrealistic understanding of how much retirement savings it will take to maintain a current lifestyle. For instance, $100,000 in a defined contribution plan “looks like a lot of money to many people even though it provides only about $617 per month in retirement income.”
  • Dual-earner households can be particularly unrealistic about how much income they will need to replace to maintain their lifestyle. “This probability also increases with income because Social Security replaces a smaller share of pre-retirement income for high earners,” the authors note.

Like economic conditions, taxes can chip away at retirement savings, too. There’s a common misunderstanding that one can dip into a retirement account tax-free, but that depends on how the account is set up and how (and when) the money is distributed. Even Social Security comes with a tax bill. To receive the most benefit there, you need to be very deliberate about when you start claiming it and what other sources of income you may have.

And when it comes to pulling from other sources outside of traditional retirement savings, plan early and often (as conditions and tax rules change). Many assets can carry surprising tax liabilities when it’s time to cash them in to help fund retirement. Some may trigger an income tax, while others trigger capital gains. While all assets appear the same to you, a professional may be able to help you separate losses from gains and offset those taxes entirely.

Income property and where you live can be important factors, too. A great housing market is just one factor that determines how valuable that property can be to you during retirement. Small business owners have an added complexity when moving from “build mode” to “exit mode.” Without proper planning, you could walk away with far less money than anticipated. We tell our clients it can take 10 years to retire right.

A million dollars in your retirement account can feel like more than enough to bow out of the working world gracefully but don’t be fooled. A general rule of thumb is to have at least 10x your salary by your retirement age, not accounting for debts and liabilities, the volatility of the marketplace, potential tax changes, and more. The only way to know if you’re on track is to assess the complete picture from the moment you start saving and be open to changes as retirement draws nearer. Feel free to contact us with questions.

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