It’s seen as the gold standard of retirement savings, but your $1 million nest egg may not be enough.
One million dollars is a lot of money; there is no question about that. Being a millionaire is something many Americans work toward as a financial goal and, in the past, many workers felt that reaching the “one million mark” was the gold standard of retirement savings. However, with inflation, the rising cost of healthcare, and retirees living longer, is having one million dollars saved truly enough to spend your golden years comfortably?
In truth, the answer is “maybe”, and we’ll discuss the reasons below.
How Far Does One Million Go Today?
A 2019 report from the U. S. Bureau of Labor Statistics showed that the average American, aged 55–64, spends around $69,000 annually on household expenses. That breaks down to roughly $5,750 a month on housing, utilities, food, entertainment, etc. Given this figure, how long will that million-dollar nest egg last?
Without adjusting for Social Security and interest, that monthly amount would last you for 173 months, or a little more than 14 years. If your retirement starts at 55, you could run out of money at age 69. Of course, there are ways to make your nest egg stretch further.
Lower Your Expenses to Reach Your Goal
If your retirement is fast approaching and you don’t have one million dollars or more saved, there is no need to panic. Multiple strategies exist to lower your monthly expenses.
One major obstacle to making your nest egg last could be your mortgage. The Center for Retirement Research at Boston College reported that, in 2019, 46% of retirees were still paying off mortgages. That is almost half of the retired population.
If you focus on paying off large monthly expenses like your mortgage while you’re still working, you can easily stretch your savings further. Assuming an average monthly mortgage payment of $1,500, that’s $18,000 per year coming out of your retirement fund. Working to remove that mortgage payment from your plate prior to leaving the workforce will add significantly more longevity to your retirement savings.
Plan YOUR Retirement
Average numbers like those discussed above can be useful as you begin planning your retirement, but the real deciding factor on how much you’ll need in retirement is YOU. How do you see retirement affecting your budget? Will you spend less, the same, even more than you currently are?
Having a solid grasp on your expected lifestyle can help to clarify much of the ambiguity around your “enough number.” Factors like taxes, additional assets, or whether you’ll continue working in some capacity all contribute to the final number you’ll need in order to feel confident about your retirement savings.
Consider these categories below, as they can help you decide what your retirement looks like and help you enact a plan to meet your goals:
Traveling figures into many retirement plans, whether to see the world or to visit family. Since it is often linked with related entertainment costs, travel plans are frequently one of the first expenses to be cut during retirement.
If traveling is a priority for you, consider increasing your retirement savings. With your goal in mind, prioritize travel over other expenses in retirement. Downsizing to a smaller home in a less costly area might mean you can more easily take those trips you’ve dreamed of. Working part-time and setting the money aside for your travels is another good alternative to maintain the health of your retirement funds.
Smart retirement planning also involves taking a look at your tax strategy. You should get clear on exactly which assets you’ll be taxed on, and at what rate.
Think about the types of retirement accounts that you have. For IRAs or 401(k)s, don’t forget these are funded with pre-tax contributions, meaning you’ll have to pay income taxes on your withdrawals.
On the reverse side, you may have Roth IRAs or Roth 401(k)s. Both of these account types are funded with after-tax contributions, and you won’t be taxed on anything you withdraw as long as you meet the retirement criteria, namely being 59.5 or older. Otherwise, you’ll incur a 10% penalty tax.
Depending on your Social Security benefits, you may be taxed on those, as well. It is a smart decision to consult with a financial advisor to help calculate how much extra money you’ll need to withdraw per year to cover your tax burden.
Timing your retirement properly is key to ensuring your nest egg lasts. Since the cost of living increases every year due to inflation, a longer retirement means a greater chance of running out of money. You might be hoping to retire at 62, but your financial plan may require that you work until 67 to meet your needs in your golden years. In twenty to thirty years, that notion of a one-million-dollar retirement will likely be in the past.
If you happen to be a younger investor, the good news is that time is on your side. If you maximize your longer earning potential to build up savings and retirement funds, you’ll find yourself in a much more comfortable position when the time comes to leave the workforce.
For investors who don’t feel like they have much time before retirement and aren’t at their financial goals yet, now is the time to visit your financial advisor. They’ll be able to sit down with you and introduce additional options to get you on track.
Yes, a Million Dollars is Possible – For Some
Despite there being options regarding your retirement lifestyle that make it possible to live comfortably with a nest egg of one million dollars, don’t set your sights low. It is a myth that you need a big inheritance or a six-figure salary to retire as a millionaire. In fact, anyone who remains disciplined about saving and investing can reach this threshold with proper planning.
Roughly 80% of millionaires created their own wealth, rather than inheriting it, and one-third never earned a six-figure salary. The secret is smart financial planning and routinely investing in 401(k)s and IRAs over a longer period of time.
Get Help with Your Financial Plan
If you really want to know whether your retirement savings goal should be $1 million – or any other amount you have in mind – you need to look at the question from your very specific financial situation. Each person has unique goals for retirement and many financial factors come into play regarding what your journey must be to achieve the retirement you desire. This is why it’s crucial to have a financial plan in place.
At Andersen Wealth Management, helping you meet your financial needs is our first priority. Contact us today to set up a complimentary, no-obligation call to discuss how we may be able to serve you as you plan your retirement.