$1 Million Isn't Enough for a Worry-Free Retirement Anymore

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Savings, close up of male hand stacking golden coins over sky background
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How much money do you need to save to retire -- to have your expenses covered, be free from worry and have a little extra to do the things you always swore you'd do? It depends on whom you ask.

Fidelity Investments recommends putting aside eight times your final annual salary, but admits several variables could change that math. Plus, how can you estimate today what your salary will be at the end of your career? That's not super-helpful advice when you're 25 and wondering how much you should save.

Other experts recommend aiming for $1 million in retirement savings. That might sound like a lot, but it's not. Consider the popular "4 percent rule" -- which suggests that 4 percent is a safe amount to withdraw from your retirement savings each year. Safe, in this case, means the odds are good that your money will last as long as you do -- since the last thing you want is to wind up retired and broke. But follow that safe and conservative withdrawal plan, and $1 million in retirement savings will only give you about $40,000 a year to live off.

You may think $40,000 sounds like enough, given that your house will (hopefully) be fully paid off when you stop working. But you'll also need to factor the added expenses that come with aging, like additional medical expenses, caring for elderly parents, and at some point, long-term care for yourself.

If you're looking to live a comfortable, worry-free retirement, I recommend aiming to put aside the equivalent of $1.5 million to $2 million in today's dollars.

What You Can Get for $2 Million

For the sake of simplicity, we'll talk in today's dollars (so there's no confusion about inflation). Let's pretend you're retiring today. According to the 4 percent rule, $2 million would give you $80,000 a year. Will that be enough to maintain your standard of living?

To get a better idea, ask yourself how much you currently spend. Remember you won't have commuting costs and your mortgage will be paid off. However, new expenses will emerge:
  • New health care costs, including the infamous "doughnut hole" (a gap in Medicare Part D prescription drug coverage).
  • Care for aging parents and sick relatives.
  • Support of any adult children still living in your basement, mooching off your utilities and groceries.
  • Tuition for your children's college or grad school education.
  • Your children's weddings.
  • Education trusts for your grandkids.
  • Paying someone to do tasks you were once able to do yourself, such as lawn care, household repairs and upkeep. When you're 70, you probably won't want to be cleaning gutters, scrubbing baseboards or repairing your own leaky plumbing.
Other Sources of Income

Bear in mind that this conversation focuses only on the money from your 401(k), Individual Retirement Account and other portfolio investments.

You'll also have Social Security payments (estimate your retirement benefits) and maybe a pension (if you're one of the lucky few whose company still provides one). Take a minute and consider any other revenue streams you'll be able to tap. Advertising revenue from your world-famous YouTube cat video? (Just kidding!) Realistically, maybe you can become a part-time entrepreneur. Or perhaps you could bring in an extra $200 a week teaching a musical instrument or tutoring high school students.

Add it all up, and you may find your annual retirement "salary" has gone up. Compare this number to your estimated retirement expenses. You can get a clearer idea of just how much you need to set aside to live comfortably.

In the End

Sad, but true: Simply being a millionaire is no longer enough to guarantee a happy, secure retirement. Aim to be a double-millionaire instead, and you can trade the prospect of Ramen dinners for visions of golf or travel. (Or golfing at St. Andrews, if you combine the two.)

Paula Pant ditched her 9-to-5 job in 2008. She's traveled to 30 countries, owns six rental units and runs a business from her laptop. Her blog, Afford Anything, is a gathering spot for rebels who refuse to say, "I can't afford it." Visit Afford Anything to learn how to shatter limits, quit your job and live life on your own terms.

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