Did you know that if you had $1 million in dollar bills, it would literally weigh a ton and take you about 12 days to count it all? No matter how you slice it, that’s a lot of money! But is it enough?
For a long time, a $1 million nest egg was the measure of retirement planning success. It was considered enough to enjoy a dream retirement and leave an impressive legacy.
But lately, the image of the $1 million nest egg has begun to fade. Articles like “How to Get By on $1 Million in Retirement,” complete with advice about tapping your home equity or retiring overseas to make your savings last, have been popping up all over the place.
So here’s the million-dollar question: Is an actual ton of money really not enough to get you comfortably through your golden years?
$1 Million Is a Good Start
Research shows Americans close to retirement age spend about $66,000 annually per household on food, housing, clothing, transportation and other lifestyle expenses including health care.1 How much will these folks need to save in order to cover these costs without income from work?
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Here’s how the math breaks down: To cover $66,000 in annual expenses, you’d need about $5,500 each month. If you had a $1,000,000 saved for retirement, that money would last about 15 years before you ran out. But those numbers could change depending on your investments’ rate of return, your withdrawal rate and inflation.
So, the short answer is that $1 million is a good start for the average person retiring today to pay their bills.
It’s Possible to Retire With Less
Now you may be thinking, That’s great . . . but I’m nowhere near $1 million. If you’re facing retirement soon and your nest egg is coming up a little short, don’t give up—you still have options. There are ways to cut your expenses and make a smaller amount of savings work without giving up your home or moving overseas.
Housing, for example, is by far the largest expense both before and after retirement, so any savings there will go a long way toward filling your savings gap.
According to the Bureau of Labor Statistics, more than half (58%) of homeowners between the ages 55 and 64 still have a mortgage.2 Their average monthly mortgage payments would be around $1,010, which adds up to a little more than $12,000 per year.3 And that’s not even taking maintenance, home repairs and other housing costs into account.
That’s why paying off your mortgage before you retire can be a game changer and dramatically reduce your spending in retirement by thousands of dollars each year.
And if you can find some other places to lower your expenses, your nest egg doesn’t have to be as big. But be careful about cutting it too close. Other things like travel, taxes and time can affect how much you’ll actually need to make ends meet over 30 or more years of retirement. So start cutting with a scalpel before reaching for the chainsaw!
How Much Do You Need to Retire?
As we mentioned earlier, the first step is to figure out how much money you want to withdraw in retirement each year (think of it as your annual salary in retirement). The next step is to figure out how much you’ll need in your nest egg by the time you retire to sustain those withdrawals.
You may plan to live off of $40,000 a year, or you may be used to an income of over $100,000 with no plans of cutting back in your golden years. There’s no wrong answer—only your answer.
How much money you need in retirement depends on your goals, your tax situation and how much time you have until you stop working. Are you sensing a theme here? It’s up to you to define your retirement dream. But remember: A dream without a plan is just a wish, so you need to create a plan to make it happen.
Let’s dig into some of the most important factors that can affect your retirement expenses.
Where Do You Want to Travel and How Often?
Many Americans who are approaching retirement dream about seeing the world and making time for hobbies and relaxation. But right now, Americans age 55 and older only spend a modest $3,350 on entertainment each year on average.4 If you’re looking forward to a lot of travel in retirement, $3,350 won’t get you very far—think Paris, Texas, instead of Paris, France.
But you have some options. You can boost your retirement savings, reduce your spending in other categories, or keep a part-time job to fund your adventures.
How Will Taxes Affect Your Savings?
Uncle Sam takes his share in retirement and income taxes have the potential to really trip you up, especially if all your retirement savings are in tax-deferred accounts like a 401(k) or traditional IRA. The money you withdraw from those accounts in retirement is subject to income taxes—just like the income you earned from your job.
For example, if you’re planning on spending $66,000 in household expenses this year, you’ll need to withdraw a few thousand dollars extra from your savings in order to pay your taxes and have enough left over to cover those costs.
Because you’re withdrawing more, you’ll need to have more saved to avoid running out of money during retirement.
Now, if you’re saving in a tax-advantaged account like a Roth IRA or a Roth 401(k), that’s a whole different story. With the Roth options, your contributions are made with after-tax dollars. That means you won’t owe income taxes on any or most of the money you withdraw from those accounts. Woo-hoo!
Keep in mind that you may pay taxes on your Social Security benefits, depending on your situation. That’s why it’s always a good idea to consult a tax pro to help make sure your tax bases are covered.
How Long Until You Retire?
Remember, these numbers are based on someone planning to retire soon. If retirement is decades away, the big picture changes drastically. For example, to cover the same $66,000 in expenses 25 years from now, you’ll need to have more than $2 million, (Thanks a lot, inflation). And that’s assuming you were saving in a Roth 401(k) or a Roth IRA, which are tax-free in retirement.
Don’t have $2 million? Don’t worry. If you’re in your 20s and 30s, you have plenty of time to build up your savings. But you need to make it a priority—starting today! Remember, the earlier you start investing, the more time your money has to grow.
And if you feel like you’re a little late to the game, don’t smash the panic button. You still have time to increase the size of your nest egg. Start by meeting with an investment pro who can help you come up with a plan to reach your retirement goals. It’s time to get to work!
It’s Possible to Retire a Millionaire
There are many folks out there who think just reaching the $1 million mark is a fairy tale meant for someone else. They think they need to win the lottery or score a massive inheritance in order to reach millionaire status.
But that’s just not true! The largest study of millionaires found that 79% of them didn’t inherit a dime. On top of that, one-third of the millionaires we talked to never made six figures in a given year!
The truth is that millionaires built their wealth by taking personal responsibility for their finances. They consistently invest in their 401(k)s and IRAs year after year. They believe their destiny—good or bad—is in their hands.
Find an Investment Pro
Everyone has a different financial situation with unique plans for their retirement years. There’s no easy answer for how much you need to retire. That number looks different for everyone. That’s why you need an investment pro on your team—someone who can help you come up with a customized plan based on your current financial picture and your goals for the future.
Need help finding a financial advisor? Our SmartVestor program can connect you with investment pros in your area who can help you and keep your plan on track so you can feel secure about your retirement future.