Please ensure Javascript is enabled for purposes of website accessibility

Here's How Much Retirement Income a $1 Million Nest Egg Could Provide

By Christy Bieber - May 9, 2021 at 9:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It may not be as much as you'd think.

Are you hoping to save $1 million for retirement? 

A seven-figure nest egg sounds like a substantial sum, which may have you convinced that becoming a millionaire will leave you well prepared for your later years.

The reality, however, is that $1 million may not stretch nearly as far as you're hoping it will. In fact, you may be shocked at just how little income you'd actually end up with if you hit your $1 million goal but didn't do so until far in the future. 

Older couple reviewing financial paperwork with advisor.

Image source: Getty Images.

Here's what life with $1 million in retirement savings would look like

Having $1 million saved for retirement doesn't mean you can just spend at will, because taking too much money out of your retirement fund would leave you at risk of running out of cash while you still need to rely on that account. 

You'd need to limit the amount of your million that you access each year by choosing a safe withdrawal rate. There are a number of techniques to do that, but one common one is called the 4% rule. If you follow it, you can take out 4% of your retirement account balance in the first year after quitting work and then increase withdrawals annually only to keep pace with inflation -- and you theoretically shouldn't run out of money.  

If you have $1 million saved and you opted to follow the 4% rule, that would give you $40,000 annually in retirement income. Sounds pretty good, right?

The only problem is, you have to consider how inflation is going to affect your buying power. If you have $1 million right now and are retiring, you're probably in pretty good shape. But if you're working now on saving $1 million for a retirement that's 30 years away, your nest egg is going to be worth far less in real terms once you take inflation into account. 

If you retire in 2051 with $1 million and follow the 4% rule, your $40,000 in retirement income that your investments produce will likely only have the buying power of $19,070 in today's dollars. And that may not be enough to allow you to maintain your standard of living, especially when you consider the fact that Social Security also isn't keeping pace with inflation and that benefit cuts in the future are a real possibility

Be smart about your retirement prospects

The bottom line is, when setting retirement goals, you must consider how much income your investments will produce for you in the future -- and what buying power that amount of income will provide after taking the effects of inflation into account.

The further away you are from retirement, the more important it is to do that assessment; otherwise, you may see that your projected future retirement account balance looks like a large number -- like $1 million -- but actually won't stretch nearly as far as you think.

And it's better to know that early on in life so you can set a higher retirement savings goal and work toward building the financial security you deserve.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.