Though there's no magic savings number that guarantees financial security in retirement, $1 million is generally regarded as a good target to aim for. Not only is it a nice round number and impressive-sounding milestone, but if you were to withdraw from a $1 million nest egg at a rate of 4% per year, you'd get $40,000 of annual income to work with. When we throw in the roughly $17,000 a year the average Social Security beneficiary collects, that's $57,000 to spend on an annual basis, which is basically what the median U.S. household income looks like today.
But while amassing $1 million is certainly something to be proud of, it may not come to be enough to sustain you during your golden years. Here are a few reasons why.
1. Your basic expenses might mostly stay the same, or even go up
Many people are quick to assume that once retired, their living costs will magically go down. But other than commuting expenses, the bulk of your bills will most likely stay the same once you're no longer working.
Think about the things you spend money on today, like housing, food, utilities, and clothing. You'll still need those things as a senior, and while you might scale back a bit in an effort to be frugal, there's an equally good chance you'll wind up spending more money on certain expenses, particularly leisure (you'll have more free time to occupy) and healthcare.
Believe it or not, 46% of seniors spend more money, not less, during their first two years of retirement than what they spent during their working years, according to the Employee Benefit Research Institute. Now to be fair, two years is a small amount of time over the course of what could be a 20-year retirement or longer, but it's something to be aware of nonetheless.
2. Your healthcare costs could skyrocket
Many folks figure that once they get on Medicare, their health-related needs will be less expensive. But while you might pay less for your Medicare premiums than what you paid for insurance during your working years, there's a host of out-of-pocket costs you'll still need to contend with, such as copays and deductibles. Throw in the fact that Medicare doesn't cover a lot of key services seniors need, like dental care, vision, and hearing aids, and you could see your healthcare costs come in much higher than expected. This especially holds true if you wind up needing long-term care, which 70% of seniors will require in their lifetime.
3. Your Social Security benefits might get slashed
There's a lot of fear circulating these days that Social Security could be heading toward bankruptcy. Now the good news is that the program is by no means going broke, contrary to popular rumors. The bad news, however, is that the program is facing some serious financial challenges that, if left unaddressed, could result in a 21% reduction in benefits as early as 2034. This means that both current and future recipients could get a lot less out of Social Security than initially expected.
In other words, that $17,000 the average beneficiary collects today could get whittled down to just around $13,400 if the current worst-case scenario comes to be. And that's why you might need to make an effort to build even more savings, even if you're currently looking at hitting the $1 million mark.
Whether a $1 million nest egg will suffice in retirement will depend on a number of factors. If you're able to live frugally, don't encounter many medical issues, and find other creative ways to generate income (say, by monetizing a hobby or renting out a portion of your home), then you might very well end up living comfortably on $1 million. But if you'd rather not take chances, aim to do better during the remainder of your working years. Slash expenses in your budget to free up more cash to save, and consider working longer to boost your nest egg and avoid dipping into it sooner than necessary. There's really no such thing as having too large a savings balance going into retirement, so the more you're able to accumulate, the better off you'll be.