For decades, $1 million was the gold standard for retirement saving, the number that meant you'd made it and could now relax and enjoy your golden years. Today, many still see $1 million as the benchmark to measure their progress against. If you're one of those people, I have bad news: $1 million probably won't be enough.
This antiquated figure harks back to the day when workers could expect more support from the government and their employer, and their savings didn't have to last as long. But times have changed, and $1 million just doesn't get you as far today. Here's a closer look at why and how to figure out what you really need.
The changing landscape of retirement planning in America
Forty years ago, average Americans retired in their early to mid-60s and could expect to live another 10 to 15 years. They saved what they could, but they didn't have to do it all alone. More than 80% of private-sector workers had pensions they could count on, and then there was Social Security. Full retirement age was still 65, so people didn't have to wait as long as they do today to receive their full scheduled benefit per check. Plus, everything was so much cheaper back then.
But things started to change in the 1980s. The government passed several laws that began the decline of the private-sector pension, and it made amendments to the Social Security program that increased the full retirement age, so workers had to wait longer to claim in order to receive their full benefit per check. The amendments also decreased the maximum benefit workers were entitled to if they delayed benefits until 70. At the same time, life expectancy was rising and inflation was reaching new heights, so people had to stretch their dwindling retirement dollars even further.
Today, only 15% of private-sector employees have a pension. Social Security's full retirement age is 67 for most working adults, and its future is more uncertain than ever. The average life expectancy is 78.6, but the Social Security Administration estimates that one in three 65-year-olds retiring today will live past 90 and one in seven will live past 95. That means your retirement savings may have to last 30 years or more if you intend to retire in your early 60s. And we haven't even talked about the biggest wrecker of wealth yet -- inflation. Annual inflation between 1980 and 2019 was 3.09%. That may not seem like much, but if you want the buying power that $1 million had in 1980, you now have to save approximately $3,276,000. That $1 million nest egg isn't looking so good now, is it?
How to calculate how much you actually need for retirement
The first step to determining how much you actually need for retirement is to figure out how long your savings have to last. Estimate your retirement age based on your lifestyle and family health history, but figure high to be safe. Then, subtract from this your estimated retirement age to figure out how many years of living expenses you need to cover.
Next, estimate your average living expenses in retirement, keeping in mind that some costs, like healthcare, may increase, while others, like child care, may decrease or disappear altogether. Multiply your estimated annual expenses by the number of years of your retirement, adding 3% annually for inflation. A retirement calculator can help with this. Once you have your total estimated retirement expenses, subtract any amount you expect to receive from a pension or Social Security to figure out what you need to save on your own. Create a my Social Security account to estimate your Social Security benefits at different ages.
Your retirement calculator should also estimate how much you need to save each month to hit your goal. Use 5% or 6% for an estimated investment rate of return. It's possible your investments could grow by as much as 7% or 8% per year, but you want to be conservative so you don't come up short.
If you can't meet your monthly savings goal, tweak the numbers until you can. Consider delaying retirement, delaying Social Security benefits, or cutting your expenses in retirement to reduce your overall costs. Take advantage of employer 401(k) matches and increase your retirement savings every time your income increases until you reach your goal. You should also rerun your retirement plan calculations every few years to make sure you're still on track.
A $1 million nest egg is certainly better than nothing, but if you want a comfortable, stress-free retirement, no arbitrary number is going to work. You need to create a personalized retirement plan that takes your goals and lifestyle into account. It may mean adjusting your spending habits now, but that's easier than coming up with tens of thousands of dollars when your retirement accounts run dry.