Understanding how much you need for your retirement isn’t easy. It may feel like all you know is that it’s a big number. And with so many variables in play, it seems simpler to just pick a large sum that feels like a substantial amount of money.
Because of this, many people assume they need $1 million to retire. If they hit that number, they’re golden. But is a million bucks enough for your retirement savings goal?
It might make sense to aim for this size nest egg. But the amount you need to save isn't as simple as finding a number that sounds great. You need to look at a slew of other factors to determine what “enough” money for retirement looks like for your specific situation. Here’s some of what you need to consider.
Understand Your Tax Situation
The more you pay in taxes, the less money you’ll have for retirement. Using our $1 million mark as an example, let’s look at how that money could be allocated across four different portfolio arrangements — and how each has a different actual value when it comes to funding your retirement.
1) If Your Million Is in a Roth: Having $1 million in a Roth account, (be it an IRA, 401(k) or 403(b)), is ideal. Why? There are no taxes on distributions. In this scenario, your $1 million truly is $1 million.
2) If Your Nest Egg Is in Traditional Tax-Deferred Accounts: Now let’s imagine your million-dollar retirement nest egg lives in a tax-deferred account, like a traditional IRA rollover or a traditional 401(k). Thanks to the impact of taxes, your account may only be worth $850,000, $750,000 or even just $600,000.
And that's just considering federal income tax on your distributions in retirement. Your $1 million could be further reduced by state taxes.
3) If You Incur a High Basis ... If your $1 million is in a taxable account, what's the basis (the original purchase price) of your investments? If you bought all your investments yesterday, your $1 million is truly worth $1 million.
4) ... But If You’re Dealing with a Low Basis: If you bought all your investments decades ago, you are likely looking at a big tax bill when you sell anything in the $1 million portfolio. Said another way, your $1 million portfolio isn't really worth $1 million after you consider taxes.
What’s the Length of Your Retirement?
Another factor to consider when determining if $1 million is enough to retire on: How long will your retirement be?
Do you plan to retire at age 70 or 55? What's your family's average life expectancy: about 80, or were your grandparents all centenarians?
If you plan on retiring at 70 and a family history with a shorter life expectancy (or your own poor health) dictates only a decade in retirement, then $1 million is more than likely going to be sufficient retirement savings.
But if you plan to retire early and your other family members lived to 100? You’re going to need more than $1 million in savings to make it through your long retirement.
What About Your Living Expenses?
Just like the length of retirement plays a big role in how far a million bucks can stretch, so does how you plan to spend that money. How much money do you want to spend? What's your intended lifestyle?
Do you see yourself reading books in your living room, working on your garden and playing bridge with your neighbors in retirement? If so, then $1,000,000 may be enough. But, if you see yourself traveling half the year and lodging at 5-star hotels, $1 million may leave you short of what you really need for the retirement you want.
Think About Other Income Sources
If you think about the length of your retirement and the type of retirement you want to have and find that $1 million won’t be enough after all, don’t panic. Saving more and more isn’t necessarily the answer, because you don’t have to live on savings alone.
A million dollars in a vacuum won’t fund many people’s retirements, once we consider all these factors here. Assuming a 2% safe withdrawal rate, that's only $20,000 in annual income. But working with one or two household Social Security income streams, and/or a pension benefit payment as well, makes a world of difference.
You won't get far on $20,000 in annual income. Adding an additional $30,000 from Social Security benefits could bring that total to $50,000. You'll have a much different quality of life living on $50,000 vs. $20,000.
Look at the Fees on Your Accounts
Our clients are probably sick of us talking about fees all the time. But we never stop talking about fees on your investment because they matter so much. You can pay 3% for your investment funds or you can pay 0.03%. That 100-fold difference creates a huge impact on your chance for a successful retirement.
If your retirement savings goal is $1 million, your actual savings needs to be higher to account for the fees your investments incur. How much you pay in investment fees will help determine just how valuable your $1 million of retirement funding is when you’re ready to use it.
Is $1 Million Enough to Retire?
As with all financial planning questions, the answer is, "it depends." It all boils down to your particular situation — which is why working with an objective, educated third party can be so valuable.
Talk through these factors and more with your financial adviser to get a rational — not emotional — perspective on how to make the retirement you want work for you and your financial plan.
To see the original version of this article, click HERE.
Taylor Schulte, CFP®, is founder and CEO of Define Financial, a fee-only wealth management firm in San Diego. In addition, Schulte hosts The Stay Wealthy Retirement Podcast, teaching people how to reduce taxes, invest smarter, and make work optional. He has been recognized as a top 40 Under 40 adviser by InvestmentNews and one of the top 100 most influential advisers by Investopedia.
BNPL Sector Faces Financial and Regulatory Challenges
The Kiplinger Letter BNPL companies are facing the challenges of high costs, tightening financial conditions and regulatory scrutiny.
By Rodrigo Sermeño Published
Speaker Mike Johnson’s Honeymoon is Over: The Kiplinger Letter
The Kiplinger Letter House Republicans remain divided on key initiatives.
By Sean Lengell Published
How to Measure the Health of Your Retirement Plan
These five key indicators can help you make decisions based on the overall performance of your retirement plan rather than individual variables.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) Published
Four Easy Ways to Get Yourself Fired
Being a standout on the job can sometimes be as simple as showing up to meetings on time, responding promptly to requests, doing your homework and not being a jerk.
By H. Dennis Beaver, Esq. Published
How Might the Great Wealth Transfer Change Society?
As $84 trillion in assets move from Baby Boomers to younger generations, we could see a greater emphasis on financial technology and investing based on values.
By Jennifer Wines, JD, CPWA® Published
Why More Retirees Might Come Out of Retirement
It’s often not solely because of financial reasons, but because of a lack of purpose in retirement. This financial expert can relate.
By Chris Blunt Published
What Would Accreditation Change Mean for Real Estate Investors?
Investors determined by a test to be ‘financially savvy’ would be allowed to invest in ways that they can’t now without having a certain level of assets.
By Edward E. Fernandez Published
Five Simple Year-End Tax Tips to Set Up a Successful 2024
If you wait until the new year, you may miss out on some valuable tax planning strategies. Here’s what you need to know before closing out 2023.
By Julie Virta, CFP®, CFA, CTFA Published
Six Estate Planning Tips for Younger Generations
Millennials and Gen Zers are taking their estate planning seriously. These tips can help make the process seem less daunting.
By David Weinstock, CFP®, AEP®, CPA Published
Year-End Tax Planning for a Financially Healthier Retirement
Getting your tax ducks in a row for the end of the year can decrease your tax liability and make the most of your income, now and in retirement.
By Ryan Marston, Investment Adviser Representative Published