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Is $1 Million Really Enough for Retirement?

By Diane Mtetwa - Jun 3, 2021 at 5:45AM

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How much you need for retirement could be very different than you think.

Saving $1 million dollars is a great accomplishment, and a retirement savings goal that many have. But while it may be plenty for some people to retire on, it may not be enough for others.

Rather than a blanket dollar amount that you should save, the amount you need when you retire is very specific to you and depends on these two things.

Man with his hand on his temple while looking at a piece of paper in his hand.

Image source: Getty Images.

1) What income sources will you have in retirement?

If you qualify for Social Security, you can count this as one of your guaranteed income streams. You also might have a pension that you can depend on when you stop working. And having an extra monthly payment like this could make a huge difference in the amount of money that you need to save.

Studies have shown that if your accounts are invested in 60% stock and 40% bonds, taking no more than 4% per year from your retirement assets, like your 401k or IRA, is a good withdrawal rate to aim for. Using this withdrawal rate, you would need a balance of $900,000 if you wanted $36,000 in income in the first year of retirement. And if you had a pension or other income source like it that provided you with this amount, you may have to save less than someone who didn't.

2) How much will your expenses be in retirement?

Figuring out this number will involve taking stock of essential bills that you may have like your mortgage or rent but also discretionary spending like travel. You may also benefit from budgeting for unexpected expenses that could increase in retirement like spending on healthcare. For the average person, the amount needed ends up being about 80% of your pre-retirement income.

So if you have a salary of $100,000 in the last year before you retire, you may need $80,000 a year when you stop working. But if you drastically cut your expenses, it could be less and if you have no plans of your changing your lifestyle, it could be more. 

How much will you need? 

Ultimately, you can find out the amount you should save by taking your retirement expenses and subtracting them from your retirement income. The number you come up with will either be positive, zero, or negative. If it's positive or you have just enough, you are one of the lucky individuals who may not need to save much money for your retirement. If you end up with a deficit and your expenses exceed your income, you shouldn't start panicking immediately. This starting number isn't a sign that you can't retire, but instead can act as a guide for how you can close this gap. 

If for example, your income in retirement is $3,000 each month and your expenses are $4,000, you need $1,000 each month from your retirement assets for a total of $12,000. Generating $12,000 from your retirement assets would require a starting balance of $300,000 using a 4% withdrawal rate. If you have 20 years until you retire, investing $6,000 annually and earning 8% each year on average can help you grow your accounts by this much.

You can also work toward cutting your expenses. The higher your bills are relative to your income, the more money you'll likely need. And if you find that the amount you need is too much, you can spend the years leading up to your retirement decreasing your spending. 

How is your money invested?

Even if you determine you don't need a high amount saved, inflation could change this. You can calculate inflation in your retirement planning by increasing your expenses annually by average rates of inflation. Between the years of 1914 and 2021, the average inflation rate has been 3.23%.

One of the best ways that you can combat inflation is by keeping some portion of your accounts invested in stocks after retiring. If you owned a portfolio made up of 60% stocks and 40% bonds, it likely would've earned an average rate of return of 9.1% between the years 1926 and 2020. If you took 4% out of your accounts while experiencing this average rate of return and inflation, your accounts could still grow and your purchasing power wouldn't get eroded as much as if you had more conservative investments or cash

If you prefer a smaller percentage of stock, you will probably experience less volatility but will get a lower rate of return. If this is the case, you may need more money to help you keep pace with inflation since you can't depend as much on the stock market for this purpose. 

Saving $1 million is a goal that you may aspire for -- but you shouldn't guess whether or not this amount is enough for you. And a more personalized approach may be a better way of making sure you can live the life you've always dreamt of in retirement.

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