While $1 million was once the gold standard for retirement accounts, times have changed. A recent Northwestern Mutual survey found that Americans now believe they'll need a whopping $1.46 million to retire comfortably, the highest estimate ever reported. In 2023, Americans believed they needed to save $1.27 million to reach their retirement goals.
This new benchmark might seem overwhelming, especially if the million-dollar mark already felt like a stretch. But keep in mind that retirement is personal, and the exact amount of money you will need will depend on your unique circumstances and lifestyle choices.
So how do you know if you'll need to accumulate a million dollars or more to retire? Here are three questions to help you get closer to your magic number.
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1. What does your vision of retirement look like?
The amount you need to save for retirement ultimately depends on your lifestyle, health, and other factors. You'll want to dig into your expected expenses to determine how much retirement may cost you. Here are a few questions to consider:
- Do you plan to relocate to a different city, state, or country?
- What type of housing arrangement works best for you?
- What does your daily routine look like?
- What will your spending habits look like?
- What hobbies and interests do you want to pursue?
- What luxuries are important to you?
After you jot down your retirement vision, then estimate the costs associated with each one. You'll also want to add up your estimated monthly living expenses, including housing, food, utilities, and healthcare to determine the minimum amount you'll need to stay afloat each month.
2. Will your future income cover your expenses?
Unexpected expenses can pop up and quickly throw a wrench in your savings plan. It's important to have multiple income streams flowing in every month to avoid dipping into a significant portion of your savings each year. So the next step is to tally up all of your expected sources of income in retirement, which can include the following:
- Social Security benefits
- Employer-sponsored retirement plans such as a 401(k) or 403(b)
- Individual retirement accounts
- Interest income
- Dividend income
- Annuities
- Real estate income
- Part-time job
- Consulting
- Royalties
- Business income
Some financial planners suggest replacing about 80% of your pre-retirement income to maintain your current lifestyle. For example, if your annual income before retirement is $120,000, you should aim to have at least $96,000 of annual retirement income, which comes out to $8,000 per month.
But if you need more than that to afford your retirement vision, you'll want to adjust the numbers. Maybe you want to shoot for 90% to 100% of your retirement income or find ways to slash your biggest expenses so you can still retire comfortably.
3. Is your retirement nest egg big enough?
If you don't have enough income from your core sources each month, you'll need to ensure your nest egg is big enough to fill in the gaps. Online retirement calculators can help estimate how much you'll need to save, though results may vary. Another useful guideline is the 4% rule.
The 4% rule is a popular rule of thumb for retirement spending. It suggests withdrawing up to 4% of your savings in the first year of retirement and adjusting your withdrawals for inflation in subsequent years. This rule can help ensure you don't run out of money for at least 30 years.
For example, if you have a $1 million nest egg, according to the 4% rule, you could withdraw $40,000 in the first year of retirement. Assuming a 2% inflation rate, you'd withdraw $40,800 in the second year. So, if you find that you're short $30,000 per year when you calculate your estimated income and expenses, having $1 million saved would be more than enough if you stick to the 4% rule.
It's challenging to determine if you'll need more than $1 million to retire comfortably because no one has a crystal ball that can predict the future. Inflation is unpredictable, and tax policies can change. However, by tracking your spending and income now and continuing to do so in retirement, you'll have the information needed to make adjustments to your retirement plan when unexpected things happen. The more flexibility you have during retirement, the easier it will be to live the retirement you've always dreamed of.
