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The Typical American Expects a Million-Dollar Retirement. How Do You Compare?

By Michael Douglass - Mar 6, 2016 at 7:20AM

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Do you really need a million dollars for retirement?

Photo credit: retire401kcalcaulator.org via Flickr.

Gone are the days when millionaires conjured images of black-tie soirees and enormous -- almost senseless -- wealth. (Inflation ain't fun, folks.)

Nope, we're at the point now where the typical American expects to need $1 million saved for retirement, according to a survey conducted by the Transamerica Center for Retirement Studies (link opens a PDF).

Just because a million bucks is what the median American estimates he or she will need in retirement doesn't necessarily make it true. After all, 53% of respondents to the survey admitted that their retirement number was a guess. (By contrast, only 7% of respondents used a retirement calculator. Clearly there's a lot of work to be done here.) And even if the numbers were well informed, you may differ from the typical American in a variety of ways. But let's go through the numbers and try to parse out whether a million bucks is a reasonably good number to use.

Working the math
Let's start with some basic assumptions: We'll use the 4% retirement rule, a commonly used rule of thumb that assumes a retiree should spend 4% of his or her savings in the first retired year and adjust for inflation after that. We'll also take the advice of most financial planners and ballpark that the typical retiree needs around 75% of his or her pre-retirement income to live comfortably in retirement.

The typical American household earns about $60,580 in the years leading up to retirement, so according to our assumptions that household could live comfortably on 75% of that, or around $45,435 annually. Four percent of a million bucks is $40,000, so in their first year, the household would be short roughly 12% of the annual income it would need for retirement.

Digging deeper
But there's a bit more to it than that. First off, the math here neglects Social Security payments. The average American retiree receives $1,294.76 in monthly Social Security benefits as of November 2015, the most recent month available. That works out to over $15,000 in annual income (assuming a household of one -- and if there are two in the house, and both worked, well, you can do the math with the following chart). So, suddenly it looks like a million bucks might be even a little more than enough.

Source (and photo credit): Social Security Administration.

On the flip side, potential medical expenses are a big and scary variable in retirement. According to a report compiled by HealthView Services, the typical healthy 65-year-old couple can expect to spend around $394,954 on healthcare in retirement -- excluding long-term care expenses. But long-term care can hit your finances with an immediate, substantial shock. According to work done by the good folks over at Genworth, a private nursing home room costs over $90,000 annually. And a home health aid would run the average family $45,760 annually. So it makes sense to have some financial buffer (including, potentially, long-term care insurance) ready for just such a potential issue.

It seems reasonable, but ...
Given the pluses and minuses I've shared, a million bucks seems as if it may be a reasonably good number for the average American family near retirement age.

But the numbers I've shared might not be useful for you at all.

After all, you and your spouse might make more (or less) than the typical American household. You might be expecting a different amount from Social Security. You might be in better or worse health -- or have a family health history that differs significantly from the average. Because of that, you may need to think differently about your potential healthcare expenses. You may want to spend up in retirement because there you have big plans for vacations, trips, hobbies, or whatever else, so the 75% rule I shared may not even apply to you.

What you can (and should) do, instead, is take a long, hard look at your potential retirement expenses and figure out what amount of saving makes sense for you, given the issues I've shared. Chances are good that you're a long way away from that number. Fortunately, there are a number of ways to juice your savings. Start with better budgeting, and if you're still stuck for ideas as to how to make and save more money, we've got plenty. A small amount of time spent now can help make a huge difference in your retirement, so take the opportunity to get ahead of the game now.

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