Many people have the goal of retiring with $1 million. And if you manage to amass $1 million by the time your career comes to an end, that's definitely something to be proud of.
At the same time, you can't assume that a $1 million nest egg is all you'll need for a secure retirement. In fact, you may end up getting a lot less annual income from your savings than anticipated. Here's why.
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1. You may have to stick to a lower withdrawal rate than expected
For years, financial experts have sworn by the 4% rule. The rule states that if you start off by withdrawing 4% of your nest egg your first year of retirement and then adjust future withdrawals for inflation, your savings should last a good 30 years.
But at this point, the 4% rule doesn't necessarily make sense to follow due to factors like lower yields on bonds today, versus when the rule was established, and longer life expectancies. In fact, research by Morningstar points to 3.3% as a more viable withdrawal rate for today's retirees.
For a $1 million nest egg, that leaves you with $33,000 a year in income. That's not nothing, but it also means you won't necessarily be living it up.
2. You could lose some of your money to taxes
If you have your retirement savings in a Roth account, whether it's an IRA or a 401(k), then you won't have to worry about paying taxes on your withdrawals during your senior years. But if you have your savings in a traditional retirement plan, the IRS will get a chunk of the money you remove.
Let's assume your tax rate is 22%. In that case, the $33,000 you get to withdraw from your savings suddenly becomes less than $26,000 in spendable income.
Don't get caught off-guard
You might think that accumulating a $1 million nest egg will mean you're all set for retirement. But actually, you could end up with a relatively small amount of annual income, even with that high a savings balance. So you may want to aim for more savings than $1 million if you're still working and have ample time to aggressively fund your nest egg.
Another tactic to consider is filing for Social Security strategically. The average senior today collects $1,657 a month, or about 20,000 a year, in benefits. But if you delay your filing beyond your full retirement age, you can boost your benefits by 8% a year up until you turn 70. Furthermore, there are steps you can take during your career to raise your benefits, like fighting for higher pay and actively developing job skills that render you eligible for it.
You can also look at other ways to boost your retirement income, from working part-time to renting out a portion of your home. The key, either way, is to be realistic about the amount of money your nest egg will provide you with -- and not to assume that a $1 million balance means you'll be living a life of luxury.
