SUMMARY: For many years, the conventional wisdom has been that you need to save $1 million for a comfortable retirement. Is this still an accurate (or realistic) goal?
For many years, the conventional wisdom has been that you need $1 million for a comfortable retirement. Our modern economic landscape makes that figure a little less carved in stone. The financial realities facing boomers, Gen Xers and so on down the line—have changed significantly in the past few decades.
Pensions have slowly gone the way of the dinosaurs, leaving 401(k)s and IRAs to pick up the slack. Add to that continued low interest rates, plus longer life expectancies and savings become even more vital as a complement to returns on your investments.
But how far can you really get on $1 million in retirement? Answer these questions and you’ll start to get an idea.
What does retirement mean to you?
Your plans for your golden years will determine how much money you actually need at the ready. Are you looking forward to traveling the world or flying to see the grandkids every few months? Or do you find your bliss working in the garden, taking long walks and living simply?
In the first scenario, $1 million will likely not be enough. In the second, it may feel like an abundance. Considering that only 7 percent of us have that amount at the ready, it’s worth digging a little deeper.
How much will it cost?
The first step to achieving your dream retirement is to know what resources you have to get there. Sit down and go over monthly expenses (food, utilities, rent/mortgage, taxes, car, etc.). Be sure to include some estimates for later life medical needs—long-term healthcare can be rather pricey.
We’re living longer than back when the $1 million mark was conceived (one in three 65-year-olds will live past age 90; one in seven past age 95), so the chance to outlive your savings is higher than it once was.
A useful starting point is to compare yourself to the average retiree—if you’re 65 or older, you can expect to spend an average of $48,885 each year.
How will I pay for it?
Now that you have some cost estimates, where’s the money coming from to pay for them all? This may include Social Security, a pension (if you have one), rental income or annuity payments.
If you find yourself coming up short, there are ways to make up the difference—boost your retirement savings contributions, work into your retirement years, work part time after retirement, postpone Social Security up to age 70.
How much should you pull from investments? General wisdom suggests 4 or 5 percent per year. With $1 million in your retirement accounts, this means an annual drawdown of $40,o00 to $50,000 a year, although very low interest rates have led some to suggest a lower rate of 2 to 3 percent.
What will your family need?
An increasing number of people are members of the “sandwich generation,” taking care of both their kids and older relatives. The resources needed for this can be extraordinary. Likewise, if you have grandkids, you may feel compelled to toss quite a bit their way to help with expenses, including schooling, braces and trips to Disney World.
What about taxes and inflation?
Your income on paper may look fantastic, but be sure to include state and federal taxes, as they can dramatically affect your cash flow. A traditional IRA lets you deposit tax-free, but takes this away as soon as you start taking distributions. A Roth IRA, on the other hand, taxes you now but allows you to take distributions with no deductions.
Inflation can also really take a bite out of savings. Prices continue to rise every year and the cost of living is going up faster than it has in more than a decade.
Where can I go for help?
Some say the standards outlined above are solid guidelines that will move you toward a successful retirement. And some think it’s all bunk.
Regardless, there are many moving parts to get under control in order to evaluate whether $1 million is in fact enough to last your retirement years. A wealth advisor from TDECU can provide useful guidance. Learn more in our road map to retirement.