Am I Set for Life With $1 Million in Retirement Savings?

Northwestern Mutual reports that the average person in their 60s has $112,500 saved for retirement. So if you're nearing retirement with an IRA or 401(k) balance of $1 million, you're way ahead of the game.

But are you set for life with $1 million in retirement savings? Not necessarily.

It's more complicated than a single number

Savers often aim for $1 million in retirement funds because it's a number that, at least in theory, seems to equate to financial stability. After all, it's $1 million. That's a lot of money.

But while $1 million is a sum you should be proud of accumulating through the years, it may not buy you the retirement you want. And it's a sum you might still end up depleting in your lifetime.

For many years, financial experts promoted the 4% rule, which had you withdrawing 4% of your nest egg your first year of retirement and adjusting subsequent withdrawals for inflation. If you were to apply that rule to a nest egg with a $1 million value, you'd have about $40,000 of annual income.

But is that enough?

The answer: Maybe, or maybe not

It may be enough if you own your home outright and live in a relatively low-cost part of the country. It may not be enough if you live in an expensive city and want to spend a lot of your time in retirement traveling.

Of course, it's worth noting that funds you withdraw from your savings will likely be in addition to Social Security. But even so, let's say you're eligible for $40,000 a year in benefits. If you add $40,000 a year from your savings, that's $80,000 in total, which isn't negligible. But again, it still may not be enough for you if you lead a costlier lifestyle.

It's also important to note that the 4% rule assumes two things:

1. Your savings are pretty evenly distributed between stocks and bonds
2. You need your savings to last 30 years

If your retirement savings are invested conservatively with mostly bonds and few stocks in your portfolio, you may need to lower your annual withdrawal rate. That's because the absence of stocks in your portfolio might limit your savings' growth during retirement.

What's more, perhaps you're retiring early and think you might need your savings to last for 40 years, not 30. In that case, you may need to apply a lower withdrawal rate to your nest egg. And if so, $1 million may not be enough.

Think about what you want and need

Many people are wired to assume that $1 million in retirement savings is THE goal. But in some cases, that might leave you short.

So rather than fixate on that single number, think about what your expenses might look like in retirement and what your goals entail. Also, think about the age at which you want to retire and how you intend to invest during that period of life.

Once you run the numbers, you may come to the conclusion that $1 million isn't the target you should be aiming for. But you're better off finding that out sooner rather than later.

So don't wait until your 50s to start seriously thinking about retirement and planning for it. Instead, start early so that if you need to ramp up your savings efforts, you'll have ample time to do so before your career comes to a close.