Retiring a millionaire isn't all it's cracked up to be. One million dollars seems like a lot of money, but when you stretch it out over a few decades, it doesn't actually take you that far. If your goal is to have a comfortable retirement, you need a better plan than just aiming for this arbitrary savings target. Here's why.
Why saving $1 million may not be enough for retirement
If you spread $1 million out over 25 years of retirement, that gives you a budget of just $40,000 per year. Coupled with Social Security and possibly a pension, that might be enough to fund a comfortable lifestyle today. But many people aren't going to retire for decades.
Inflation is going to continue driving up costs, and years down the road, $40,000 isn't going to buy nearly as much as it does today. Plus, most workers don't qualify for a pension, and the Social Security trust funds are nearing depletion. That could potentially lead to benefit cuts in the future.
All of this suggests today's workers are going to need more savings to cover their retirement costs, especially if they plan on a long retirement. It's possible you could need $2 million or even more, but making $2 million your retirement savings goal isn't much better than having a $1 million savings goal. If you want to be confident you're saving enough, you need a personalized retirement plan.
How much should you save for retirement?
There are a few ways to go about estimating your retirement costs. One of the simplest is to save 25 times your annual salary. This is supposed to help your money last at least 30 years, but it may not work out that way. If you plan to make a lot of big-ticket purchases or travel a lot in retirement, you'll want to build a cushion into your budget for these expenses.
You can also estimate your retirement expenses by thinking about what your estimated annual costs might be and how many years your retirement will last. Multiply your estimated annual expenses by the number of years of your retirement, adding 3% per year for inflation. If that sounds like too much math, a retirement calculator can do the hard part for you. It'll also tell you the amount you need to save per month (and overall) to cover these costs. Again, you may want to build in a cushion if you're planning some large purchases.
Don't forget you probably won't have to fund your retirement on your own. Many workers qualify for Social Security, and if you're married, your spouse may get a benefit as well. You might also get a 401(k) match from your employer.
Try to estimate how much you'll receive from these sources and subtract this from your total savings goal. For example, if you figure you need to save $600 a month and you're getting $100 a month as an employer 401(k) match, then you only need to save $500 a month on your own.
If your savings target seems out of reach, there are a few things you can do. First, try to find more cash to put toward retirement. You could try cutting back expenses, starting a side hustle, or pursuing a raise.
If that's not possible, delaying retirement might work. It's not ideal, but even a few months' delay can make a big difference. Doing this gives you more time to save while shortening the length of your retirement too.
Delaying Social Security can also help, because every month beyond your full retirement age you avoid claiming increases your benefits until you reach 70. If you expect to live into your 80s or beyond, you'll probably get more money overall by waiting to sign up than by starting as early as possible. But if your health isn't the best, starting earlier is probably smarter. You can estimate your Social Security benefit at various starting ages by creating a my Social Security account.
Try out a few different scenarios until you find a plan that suits you. Then, see if you can set up automatic retirement account contributions so you don't forget to make them. Set up a time to review your retirement plan each year too. Use this opportunity to reevaluate your investment strategy and rethink your retirement goals. Once you've got a suitable plan, you'll feel a lot more confident you're saving enough.