When you hear people talk about saving for retirement, they tend to fixate on $1 million as an optimal goal. And it's easy to see why. Not only is $1 million a lot of money, but it's also a round number that's easy for people to wrap their heads around.
It's one thing to be told you need $4 million to retire comfortably. But you may have an easier time seeing how it's possible to get to $1 million in savings over the course of what could be a 40-year career or longer.
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But while you might think you're set if you manage to come up with a $1 million nest egg, the reality is your retirement savings might fall short in that scenario. It's important to recognize that so you can reset your savings goal as needed.
Why $1 million may not cut it
If you're planning to work until your late 70s and don't expect to live past your late 80s, then $1 million in retirement savings may suffice. The problem is that for many people, that money needs to last for 20 years or longer.
If you use the popular 4% rule to manage a $1 million nest egg, you end up with an annual income of $40,000, not including adjustments for inflation. Now for some people, that may be enough, especially when combined with Social Security benefits. But if you have loftier goals for retirement or don't want to downsize your lifestyle at all, then $40,000 a year plus your Social Security checks may not suffice.
Also keep in mind that your healthcare costs may rise in retirement, especially if you end up having to manage several chronic issues. And then there are taxes to consider.
It's one thing to have $1 million saved in a Roth IRA, where you won't pay taxes on your withdrawals. But $1 million in a traditional IRA won't go as far, since the IRS will get a cut of that money.
You may want to reset your savings goal
While plenty of people do end up retiring comfortably on $1 million, it's not a given that you'll have the same experience. So before you get your mind set on saving $1 million, run the numbers to see what lifestyle that translates to. You may find that stretching that goal to $1.5 million makes a big difference in your retirement income and lifestyle.
For example, at a 4% withdrawal rate, another $500,000 could give an additional $20,000 per year to spend (though it may not be tax-free). That money could pay for home maintenance, surprise healthcare bills, travel, and a host of other things. So if it's possible to save another $500,000, or whatever sum above $1 million you land on, it can only help.
