It's unquestionably important to do your best to build up a retirement nest egg. Retiring on Social Security alone will generally mean taking a massive pay cut and struggling financially as a result.
Now in the course of saving for retirement, it's natural to set a goal. And for many people, that goal is $1 million. And it's easy to see why.
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First, it's a nice, round figure. Secondly, it's a lot of money.
But while you'd think a $1 million 401(k) or IRA would be enough to buy you the retirement of your dreams, that may not actually be the case. So rather than fixate on that number, it's important to do some research, figure out what you want from your senior years, and make sure you're saving accordingly.
Why a $1 million nest egg may not cut it
You might think you're all set for retirement with $1 million in savings. But remember, that money needs to last for what could be several decades. So you can't just withdraw tens of thousands of dollars at a time to live it up. Rather, you need to manage your withdrawals strategically.
Now for years, financial experts were fans of the 4% rule, which had you removing 4% of your savings balance your first year of retirement and then adjusting subsequent withdrawals to account for inflation. But at this point, it's pretty clear that the 4% rule is outdated and too aggressive for a saver with a typical investment mix and retirement age.
If you don't want to risk having your money run out on you in retirement, then a 3% withdrawal rate may be more appropriate. But 3% of $1 million is only $30,000 of annual retirement income. Even if you're receiving the equivalent amount in Social Security benefits, that's not necessarily enough money to do all of the things you really want.
Set a target to meet your goal
It's more than possible to retire comfortably with $1 million in savings. But that depends heavily on what you want out of your senior years.
If your goal is travel to several new countries a year and live in a bustling city, then a $1 million nest egg may not allow for that. Similarly, you may want to be able to help your grown kids out financially once you retire, or travel frequently to visit your grandkids who live out of state. A $1 million savings balance might leave you scrambling to meet that goal.
So rather than set your mind on $1 million like so many people do, run your own calculations. Better yet, sit down with a financial advisor, talk through your goals, and come up with a savings target together that's conducive to meeting them.
If you're going to make an effort to save well for retirement, you might as well try to set yourself up for the lifestyle you truly want. And believe it or not, $1 million may not be the answer in that regard.
