The American Dream costs millions: Guaranteed income sources can prevent a retirement nightmare

The American Dream, as both a concept and an expression, has deep historical roots in the United States. The term "American Dream" was first coined by historian James Truslow Adams in his 1931 book "The Epic of America," written during the depths of the Great Depression. Adams defined it as "that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement." However, the ideals that the phrase embodies predate its coining by centuries, tracing back to the nation's founding documents. The Declaration of Independence's promise, for example, of "Life, Liberty, and the pursuit of Happiness" laid the philosophical groundwork for what would later be called the American Dream, and inspired waves of immigrants to seek opportunities for better lives in the United States.

The expression gained widespread cultural currency in the post-World War II era, when economic prosperity and social mobility seemed more achievable than ever before. During this period, the American Dream became increasingly associated with specific material markers of success: a house in the suburbs, car ownership and the ability to provide a college education for one's children. The term has since evolved through different eras, reflecting the changing aspirations and challenges of each generation. During the Civil Rights movement, it became intertwined with the fight for equal rights and opportunities. In the 1980s, it emphasized entrepreneurial success and material wealth, while in recent decades, it has expanded to encompass broader concepts of personal fulfillment, work-life balance and sustainable living. Despite these evolving interpretations, Adams' original emphasis on opportunity and the potential for a better life remains at the heart of the expression's meaning.

The $4.4 million estimate represents a substantial part of the cost of achieving traditional American Dream milestones. For retirees, this means that even if they have saved diligently, the rising costs associated with these milestones could still pose significant financial challenges.

Four key components of the $4.4 million cost comprise $4.17 million of the total, the Investopedia report found:

• Homeownership. The average cost of buying and financing a home with a 30-year mortgage was approximately $929,955. Times of high interest rates and property taxes add to this burden.
• Raising children. The cost of raising two children through four years of college can reach up to $832,172.
• Car ownership. Maintaining new cars from ages 29 to 75 can cost around $811,440.
• Retirement savings. Ideally, individuals should aim for $1.6 million in retirement savings to withdraw 4% annually over 20 years. However, many Americans fall short of this target.

The balance of the total went for annual vacations ($179,109), wedding costs ($44,300) pets ($36,626) and funeral costs ($8,453).

Unfortunately, a $4.4 million price tag for the American Dream is about $1 million more than the typical individual American can handle, the Investopedia study finds, “but is not out of line with what a dual-income household might earn.”

Based an analysis of Census Bureau data, those with a bachelor's degree earn an average of $2.8 million over their careers, and male graduates earn approximately $3.3 million while female graduates earn $2.4 million. Two-income households where both partners hold bachelor's degrees accumulate an average of around $5.6 million in lifetime earnings.

While these earnings might appear to comfortably exceed Investopedia's $4.4 million estimate for achieving the American Dream, it's important to note that this figure doesn't include other essential living expenses such as food, health care and auto insurance. When those basic necessities are factored in, the true cost of living the American Dream is substantially higher.

The path to financial security in retirement is paved with challenges. Rising costs and economic uncertainties make it difficult for many retirees to maintain their desired lifestyle. According to AARP's Financial Security Trends Survey, a growing number of adults over 50 believe they will not have enough money saved for retirement at their current savings rate. The survey found that 36% of adults saving for retirement expect to have enough money if they continue saving at their current rate, and 33% believe they won’t have enough savings. The remaining 31% say they are uncertain if they’ll have enough.

Factors contributing to retirement insecurity include:

• Health care. With the annual Genworth survey showing that the annual cost of assisted living is $64,200 and nursing home care is $116,800, health care expenses continue to be a major concern for retirees. These expenses can quickly deplete retirement savings, especially for those requiring long-term care.
• Market volatility. Retirees relying on investment income are vulnerable to market fluctuations. Sequence of returns risk can significantly impact portfolio longevity if negative returns occur early in retirement.
• Longevity risk. As life expectancies increase, retirees face the challenge of making their savings last longer. The Social Security Administration estimates that as of 2024, a 65-year-old can expect to live, on average, until age 84.3 for men and 86.9 for women.
• Social Security uncertainty. The Social Security Trust Funds are projected to be depleted by 2034, potentially leading to reduced benefits for retirees if no congressional action is taken.
• Inflation. High inflation rates have eroded purchasing power and increased living costs, making it harder for retirees to stretch their savings. For example, the Consumer Price Index rose 3.2% year-over-year in July 2024, outpacing many retirees' fixed income sources. This makes it harder for retirees to maintain their standard of living and pursue discretionary spending associated with the American Dream.

The path to financial security in retirement has become increasingly complex, given the economic landscape. With the cost of the American Dream on the rise, retirees and those approaching retirement age must carefully consider strategies to ensure they can maintain their desired lifestyle without depleting their savings prematurely.

One of the most effective ways to achieve financial security in retirement is through a diversified approach that combines various income sources and risk management strategies. A key component of this approach is the incorporation of guaranteed income streams, such as those provided by fixed index annuities. These financial products offer a unique combination of growth potential and downside protection, making them an attractive option for retirees looking to secure a stable income while minimizing exposure to market volatility.

Fixed index annuities (FIAs) have gained popularity among retirees and financial advisors as a powerful tool for creating guaranteed income streams in retirement. These insurance products offer the potential for growth based on the performance of a market index, such as the S&P 500, while providing protection against market downturns.

One of the primary advantages of FIAs is their ability to provide a guaranteed minimum interest rate, ensuring that the policyholder's principal is protected even in times of market volatility. This feature is particularly appealing to retirees who are concerned about preserving their wealth and maintaining a stable income throughout their retirement years.

Moreover, many FIAs offer optional riders that can provide additional benefits, such as guaranteed lifetime withdrawal benefits. These riders allow policyholders to withdraw a specified percentage of their account value each year, regardless of market performance or the remaining balance in the account. This feature can provide retirees with peace of mind, knowing they have a reliable income source that cannot be outlived.

In light of the increasing costs associated with the American Dream and the potential for market volatility, it's crucial for retirees to implement strategies that reduce their exposure to market risk. Here are several approaches that can help protect retirement savings and ensure a more stable financial future:

• Diversification. Spreading investments across various asset classes, sectors and geographic regions can help mitigate the impact of market fluctuations on a retirement portfolio.
• Asset allocation. Adjusting the balance between stocks, bonds and other assets based on risk tolerance and retirement timeline can help manage overall portfolio risk.
• Incorporating guaranteed income products. As mentioned earlier, fixed index annuities and other insurance products can provide a stable income stream regardless of market performance.
• Maintaining an emergency fund. Having liquid assets readily available can prevent the need to sell investments during market downturns to cover unexpected expenses.
• Regular portfolio rebalancing. Periodically adjusting investment allocations to maintain the desired risk level can help prevent overexposure to any single asset class or sector.

The staggering $4.4 million cost of achieving the American Dream underscores the importance of comprehensive retirement planning in today's economic environment. While this figure may seem daunting, retirees can take proactive steps to secure their financial future through diversified investment strategies, risk management and guaranteed income solutions like fixed index annuities. As the retirement landscape continues to evolve with challenges such as inflation, market volatility and increasing health care costs, a balanced approach combining traditional investment vehicles with protected income streams becomes crucial. By working with financial professionals to implement these strategies, retirees can better position themselves to maintain their desired lifestyle while protecting their hard-earned savings. While the traditional American Dream may need to be reimagined for modern economic realities, careful planning and strategic financial decisions can help make retirement dreams more attainable.