A lot of people aim to retire with $1 million. And it's easy to see why.
But while $1.26 million doesn't have that same round number ring to it, apparently it's the amount of savings Americans should be targeting, according to data from Northwestern Mutual.
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But will a $1.26 million IRA or 401(k) be enough to buy the retirement of your dreams? That all depends on what you want your senior years to look like.
It's a personal calculation
All retirees have certain basic needs -- food, shelter, transportation, and healthcare. Even within those categories, though, costs can look very different. A 2,500-square-foot home with a pool might cost a lot more to own and maintain than a 1,400-square-foot property with a small backyard.
But beyond the basics, the amount of money you need in retirement will hinge on what you want to do with your days. If you have inexpensive hobbies like hiking and reading books, you'll probably need less money to keep busy than someone who wants to spend their days playing golf and traveling the globe.
So before you can come up with any savings goal, it's important to map out a vision for retirement. Think about not just what you want to do week to week, but where you want to live, what sort of home you want to own, and how extensive your healthcare needs are likely to be (you can't necessarily know for sure ahead of time, but you can use your pre-retirement health as a benchmark).
What a $1.26 million nest gives you in terms of annual income
The money you bring into retirement may have to last for decades. So to that end, it's important to withdraw from your savings carefully.
If you use the popular 4% rule, a $1.26 million nest egg gives you $50,400 in annual income. That's not including Social Security, and your monthly benefits will hinge on your personal wage history and filing age.
Of course, you may end up using a different withdrawal rate. So even that $50,400 isn't a given.
But if you want to know what savings balance to aim for, try to come up with an estimate of your annual spending, subtract your Social Security benefits, and multiply that by 25.
For example, if you expect to spend $60,000 a year in retirement and think you'll get $30,000 a year from Social Security, multiply $30,000 by 25 to get to $750,000. That's the best way to know what savings to aim for, with the understanding that that number could rise or fall as your plans change.
