You'll often hear that if you manage to amass a $1 million nest egg in time for retirement, you're basically set for life. After all, it's $1 million. What could go wrong?
Now let's be clear. Having $1 million in your retirement accounts could do a lot of great things for your senior years. It could make it possible for you to live comfortably, especially in conjunction with a nice monthly benefit from Social Security. But even that amount might not actually be enough -- particularly in these three circumstances.
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1. You don't want to scale back your lifestyle
Some people enter retirement fully expecting to cut back on their spending to some degree to cope with having less income than they received during their working years. But if you don't want to cut your spending at all, you may find that a $1 million nest egg falls short of providing what you need to pay your bills, even when coupled with Social Security.
If you apply the 4% rule to a balance of $1 million, that translates to $40,000 in money you can spend from it annually. Even if you're getting, say, $25,000 a year in Social Security (and that would be more than the current average of around $22,400), you'd only be looking at $65,000 a year total. If you were used to living on a lot more prior to retirement and you're not willing to make cuts to your spending, you might struggle.
2. Your medical bills could end up higher than you're expecting
You can do everything in your power to take good care of your health. But at the end of the day, medical issues might arise that are just plain costly to deal with.
You may do just fine with $1 million in savings if your health stays decent throughout your retirement and your medical costs are moderate. But if you end up needing expensive medical care as a senior, then a $1 million nest egg might seriously let you down.
3. Inflation could drive your costs up
There's a reason Social Security recipients receive annual cost-of-living adjustments (COLAs) to their monthly checks. Inflation can drive living costs up to a notable degree, and those legally mandated adjustments are meant to help shield the buying power of your benefits from being chipped away by inflation.
But the value of your nest egg may not keep up with rising prices if your money is invested conservatively in retirement. Over time, you might lose buying power, because $1 million in 10 or 20 years won't be worth what $1 million is worth today.
You may want to save more
If you enter retirement with $1 million in your 401(k)s, IRAs, and other accounts, you'll be sitting on a lot more money than most seniors have. But that doesn't mean you'll be set for life.
Rather than fixate on that number, think about your personal needs and goals for retirement, and try to come up with an annual spending figure you think is a reasonably accurate estimate. From there, you can run different calculations to see how large a nest egg you should be aiming for to allow you to spend that amount sustainably each year.
You may, for example, come to the conclusion that you'll need closer to $2 million to enjoy your retirement to the fullest. Whatever figure you land on, the sooner you're able to draw that conclusion, the more time you'll have to save toward that goal.
