Today's Retirement Myth: A Million Dollars Is Enough

×

Million dollarsA million dollars is nothing to sneeze at. It's a lot of money, but is it enough to retire on? Or is it way too much?

It's a lot easier to plan for a concrete end goal. That's probably how the million-dollar benchmark for retirement savings got so popular. It's a memorable number -- and an assumption that does indeed serve a lot of people's financial plans well.

Assumptions can be dangerous, though. So before you spend the next 10 or 30 years over- or under-saving, take a little time to assess your situation. Start right now to see if a million bucks is enough -- or too much -- to fund your future plans.

Run the Numbers

The place to start is by envisioning the future you and estimating how much money you'll need to fund that lifestyle.

Make a list of expected expenses, such as housing, food, entertainment, travel, utilities, insurance, taxes, clothing, and health care. (Online calculators can be helpful for this.) Be as realistic as possible -- note, for example, that Fidelity Investments has estimated that a typical couple in retirement will spend an average of about a quarter of a million dollars on health care alone in retirement.)

You're going to end up with a big number -- one that may make you hyperventilate. Don't drop this exercise just yet. Now it's time to tally your expected income. You can look up your expected Social Security benefits at the Social Security website. As an example, the average monthly benefit for a retiree was recently $1,229, amounting to $14,748 per year. You're likely to collect more or less than that, of course -- and you can increase your benefit by about 8% for every year that you delay taking it, beyond your normal retirement age. Also, make sure to add in income from any pensions or annuities you may have, along with dividend income and withdrawals from retirement accounts such as 401(k)s and IRAs.

Going Through Withdrawals

Now that you're armed with all this data on your expected income and expenses, you can put it in context.

It helps to know how much of your nest egg you can withdraw each year, without taking so much that you run out of funds before you run out of time. The pros don't agree on any single best withdrawal rate, but 4% is respected by many as a reasonable starting sum, with it adjusted for inflation annually. You can choose to be more conservative by withdrawing less, or more aggressive by withdrawing more.

You can also tweak it all a little, depending on how the stock market does. If the market tanks right before you plan to retire, you might delay retiring for a year or two, so that your nest egg can get plumped up a bit more. Or if you're already retired, you might try to withdraw a little less than usual that year.

The $375,000 Difference

Here's some easy but important math related to your withdrawals: If you expect to have a nest egg of, say, $1 million, multiply it by 0.04 -- which is 4% -- to see what your initial withdrawal will be. In this case, it's $40,000. If you manage to amass $300,000 by retirement, a 4% withdrawal will net you $12,000 in your first year.

You can flip those numbers around, too. If your calculations show that you'll need an annual income of about $50,000 in retirement, multiply that by 25 to see how big a nest egg you'll need to generate $50,000 via a 4% withdrawal rate: $1.25 million.

Of course, your other income sources can reduce that. If you're expecting $15,000 in Social Security income and $10,000 in pension income, then your savings and investments will only need to generate $25,000 in your first year. Multiply that by 25, and you'll arrive at a nest egg of $625,000.

That's a great illustration of why you may not need to accumulate $1 million for your retirement.

The Big Picture

Everyone's situation is different. Don't leave your retirement to chance. Take a little time now to run the numbers -- your numbers -- to see how much you really need to save by the time you leave the 9-to-5 working world.

You might also visit a financial adviser to get some professional help with your planning. You can find a fee-only one (who doesn't earn commissions by selling you certain investments) at the National Association of Personal Financial Advisors website.


Increase your money and finance knowledge from home

How much house can I afford

Home buying 101, evaluating one of your most important financial decisions.

View Course »

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

Add a Comment

*0 / 3000 Character Maximum

183 Comments

Filter by:
"Run-A-Way Bill"

It is not good for a "buying" economy, but $1,000,000 goes a long way if you don't live in a super storage unit that houses all the stuff you purchase that you really don't need.

Stop buying "stuff" & purchase good times instead. The important thing to remember is "We Don't Own Stuff, Stuff Owns Us!" LESS is truly best ... the less you own, the more freedom you have!

pARTy On! ...

January 23 2012 at 2:37 PM Report abuse rate up rate down Reply
1 reply to "Run-A-Way Bill"'s comment
omcpilot

No truer words were ever spoken Bill!

September 08 2012 at 5:57 PM Report abuse rate up rate down Reply
Skip

Sorry Tahuaya, but I am not your average person who just thinks it's a scam. I am an options trader who is fully aware that the equity markets are rigged. Don't believe me? Check out max pain in options. The theory is that options almost ALWAYS close at the price level in which the most amount of open interest taken out in options expire worthless. Market makers can easily control the price that any given equity trades at. You can even see them hold back the price when unexpected news is announced. I don't know why you would think that the fed would interfere with th housing market ( by purchasing mortgage backed securities --fact) , the treasury market ( buying us treasuries because no one else will--fact) and doesn't manipulate equity markets. I hope you don't think that the run up from the march lows was retail investors snapping up bargains. If so you are easily fooled. Had our markets been legitimate, you'd have a case about intestinal fortitude buying when there is blood in the streets but capitalism has been corrupted. How about naked shorting being illegal but allowed to go on anyway?

January 20 2012 at 12:21 PM Report abuse rate up rate down Reply
Tony

This is a laughable article. The vast majority of Americans will never have a million dollars accumulated for retirement, or anything else. The average social security payment is $12,000 and about one third of retired Americans have absolutely nothing else to live on in their older years except for social security. Why these articles are constantly churned out by the media is a mystery to me. They have very little to do with reality, create anxiety, and are basically just filler for someone to try to get hits to make a little advertising money.

January 20 2012 at 3:09 AM Report abuse +1 rate up rate down Reply
ageofknowledge

Now I've been reading the 0.1% crying about having to pay 16% on each billion they earn by selling out America workers and the one thing they all agree on is that there no amount of money that is every enough.

January 20 2012 at 2:15 AM Report abuse +1 rate up rate down Reply
Tahuaya

Skip, the stock market is no scam and investing is not gambling unless you keep buying high risk stocks with high PEs. I bought my first stock at 14 with money I earned by delivering newspapers and have been investing ever since. Several times I've had the Fickle Finger of Fate jump in my investment basket and crush values. 2008 was the last big crush but I remained in the market, kept investing at the new lower prices and as the market returned, my portfolio has come back.

The people who lose are the ones who get out and are not in the market when it turns around. They then sit out while the market continues to climb and I believe these are the same people who jump back in just as the market enters another correction and declines. So these people keep missing out on the increases in value and always experience the declines. For them investing is not a gamble, it is a sure way to lose money because they do not have the temperment to do the right thing.

Skip, I believe you are probably ones of these people. Anyone who thinks they can build wealth by collecting interest has a lot to learn but usually, those are the very people who cannot understand the value of investing in equities because they do not have the intestinal forittude to hang in there when things get tough. Bailing out ensures losses when dealing with stocks.

One more point, you can lose money in bonds and this is a very bad time to be in bonds. With interest rates at historic lows, when interest rates go up, all existing bonds will lose value. So you can experience a capital loss in bonds, even though you collect interest. And, just as important, as interest rates go up, corporations will not "Call" the low interest rate bonds but will continue to pay the low interest rates until the bonds expire. But, if an investor holds high interest rate bonds and interest rates go down, companies will "Call" the bonds, cash them in and issue new bonds with the lower interest rates.

Bonds have their own risks and few investors understand that.

January 20 2012 at 1:56 AM Report abuse rate up rate down Reply
Skip

Folks, this is an article with an agenda. They are designed to portray an unreasonable amount of money that is needed for retirement to get you to participate is the giant casino scam which is the stock market. They know that right now there is no other way to reach this goal in terms of getting a good rate of return on your money so they hope you'll just decide to roll the dice in the equity market to get there. They want your money so they can steal it in the corrupt markets while they inflate away your purchasing power via dollar debasement. Don't play the rigged game, wait for higher interest rates and until then, stay out of equities.

January 19 2012 at 11:25 PM Report abuse +1 rate up rate down Reply
Cal

Sadly, none of us has any idea if one million dollars will be enough, because we have no idea when the government's reckless fiscal and monetary policies will generate hyperinflation, and for how long. We might need a million dollars to fill up the car with gas someday.

January 19 2012 at 7:13 PM Report abuse rate up rate down Reply
boogex

Lol, this is funny. I saw the headline and just had to comment. A million dollars isn't enough?!? I'd be lucky if I have ANYTHING in savings at retirement, IF I can even retire. This article is so out of touch, and anyone who recommends even a million dollars or more for retirement is out of touch. Anyone who can raise a million dollars or more for retirement is lucky, and I'm happy for them, but the rest of us, it's not realistic. The latest census data shows the majority of Americans as poor or low-income. The majority of Americans are living pay-check to pay-check. Who exactly is saving a million+ for retirement?

January 19 2012 at 7:11 PM Report abuse +1 rate up rate down Reply
Rider

WHAT?? how am I supposed to calculate for "housing" beyond 6 months from now...come on....Healthcare??? ok please someone throw a number at me beyond this coming election....Travel? to where? Food,,,,just double the price every 2 years until when? I need some ice-cream now.

January 19 2012 at 6:29 PM Report abuse +1 rate up rate down Reply
DrWatson

I am in my mid 40’s and calculate that I will need 2.4 million to retire. I have been saving for 12 years and seen my money up 50% and down (loss) of 50%. If the market is this volatile for the rest of my life (likely). I will have a 30% chance of get 20 years of half my current salary.
 
As a x gen, I don’t have a pension (guaranteed income), and have been told my entire working life that the Boomers are going to suck SS dry. So, I am not counting on it. If it still around when I am 67 then great. But, I can’t count on SS, or the stock market, so what am I suppose to do? Bonds and money market account are not yielding enough with the 16.5k cap per year for me to make my goals.
 
I have worked hard. Save the most I can. And at the end of the day, only have a 30% shot of making it.  American systems are broken.
 
Goggle “monte carlo retirement calculator”

January 19 2012 at 3:43 PM Report abuse rate up rate down Reply
1 reply to DrWatson's comment
cammerconcepts

Welcome to the "new" American Dream! Politicians have been taking money out of the SS fund for years and never put it back.

January 20 2012 at 9:48 AM Report abuse rate up rate down Reply