Is $1 Million Enough to Retire? It Depends

Having $1 million in savings at retirement seems like an ambitious goal. But with the cost of living steadily rising, having one million dollars to live comfortably through the golden years may not even be enough. Have you ever wondered how many retirees have $1 million, and is it enough to retire? 

The good news is the rate of retired millionaires has more than doubled in the last 30 years. According to a report by United Income, one out of every six retirees in America is a millionaire. In addition, an analysis by Fidelity shows there is a rising number of 401(k), 403(b), and Individual Retirement Account (IRA) millionaires. There were 378,000 401(k) and 349,100 IRA millionaires and the number trends up over time.

In a survey where workers were asked to calculate how much money they would need for a comfortable retirement, 39% of the respondents believed they would have to save $1 million.

But will $1 million even be enough to retire, let alone last you for the rest of your life? 

Changes to the 4% Rule of Thumb

Financial experts have traditionally stated that retirees should withdraw a maximum of 4% of retirement savings in the first year adjusting for inflation in subsequent years so that the money lasts them through retirement. The 4% rule of thumb comes from the Trinity study in a paper titled “Retirement Spending: Choosing a Sustainable Withdrawal Rate.” However, some experts are now saying it should be 3.3% due to lower projected returns for stocks and bonds due to market conditions.

So if you have a one million dollar retirement portfolio, a 4% withdrawal in the first year would be $40,000, whereas a limit of 3.3% will be $33,000. This can be a significant decrease, especially when consumer spending is rising. Bear in mind, though, the average retirement portfolio is typically smaller.

Is $1 Million Enough Savings to Retire?

We asked a few experts, is $1 million enough to retire, and this is what they have to say.

What Do The Experts Say?

Kevin Lao, CFP®, the founder of Imagine Financial Security LLC in Jacksonville, FL, says,

“$1 million is absolutely enough to retire if you have the right spending levels. Remember, most people will have Social Security as a baseline of guaranteed income. Studies show that Social Security represents 40% of retirees’ income. Some may also have a fixed pension from employment that will supplement Social Security…”

“The average Social Security benefit is around $1,600/month or $19,200/year. If we use the 4% as a floor of $40k/year from $1 million…add in Social Security; this gives you a range of right around $60k/year – $80k/year of gross income. Many retirees could likely live off of this if they don’t have a mortgage and keep expenses pretty low.” 

Michael R. Acosta, CFP®, ChFC®, CSLP® of Consolidated Planning states,

“It depends. There are a multitude of variables that have to be considered before being able to determine if $1 million is enough to retire. For example, here are just a handful:”

• What is the expected annual lifestyle expense for the client?
• Are these pre-tax, taxable, or tax-free dollars?
• How much is expected to be received from social security, if any?
• What is the life expectancy of the client(s)?
• What is the client(s) health?
• Are we in a state with both federal and state income tax?
• Is the client’s home [entirely] paid?

“My professional opinion is that $1 million is enough for some and may not be enough for others.”

Sean Polley, CWM®, of Polley Wealth Management gives this opinion,

“It depends on your individual lifestyle, when you retire and where that $1 million is placed when you retire. Everyone is different and lives a unique lifestyle. Therefore, through proper financial planning, you will be able to determine if $1 million is enough for you to retire.”

Danielle Miura CFP®, of Spark Financials, has this to say,

“Longevity, lifestyle, and geographic location will determine how far your money can provide you. For example, a million dollars in retirement will not last long if you plan to travel the world in retirement. Inflation and long-term care costs are risks to a sustainable retirement. With the average yearly cost of long-term care at $100,000 (Genworth study), long-term care could substantially deplete your retirement assets. Inflation will lower your purchasing power forcing retirees to burn through their savings faster.”

Factors Affecting Retirement Planning

Several factors impact the amount of money people need to have available in retirement savings to continue to live a life of financial security.

Lifestyle Choices

Some retirees will enjoy the slow pace and tranquility in the next chapter of their lives, perhaps focusing on hobbies and grandchildren. As a result, they likely won’t have to dig deep into their savings. Others will go where the wind takes them, traveling from one destination to another. This lifestyle will require retirees to have a hefty amount of savings available. In fact, almost half of retirees spend more than expected on traveling.

Your lifestyle choice is an essential factor when determining your financial goals. So before you sit down with an advisor or create your budget, think about how often you plan to travel or make large purchases. 

Location

Where you live your retirement life can significantly impact the amount of money you need to live comfortably post-retirement. GOBankingRates analyzed the Bureau of Labor Statistics’ 2020 Consumer Expenditure Survey data. The results showed that $1 million would last you between 11 and 24 years, depending on where in the United States you live. Since some southern and midwestern states have a lower cost of living than the northern and western states, southern residents may be able to stretch the million dollars a little longer.

Healthcare

Healthcare costs in America can be staggering. According to the Fidelity’s Retiree Health Care Cost Estimate, an average retired couple at age 65 may need around $315,000 after-tax saved to cover health care expenses. This value trends up with time.

With people living longer and retiring earlier than before, at an average age of 62, retirees need to tap into the healthcare system more than before. Also, since Medicare is not accessible until age 65, many early retirees have to find other ways to fund their healthcare costs for a few years.

Inflation

Rising inflation rates reduce our purchasing power. Inflation is a factor to consider because as prices rise, so will the bills and the need to have more savings for retirement. A sharp increase in the inflation rate can cause consumer prices to skyrocket.

Based on these factors, retirees may need even more than $1 million in savings to help them live the lifestyle they want to lead while paying their expenses comfortably.

How To Maximize Your Savings for Retirement

Start Investing Early

The amount you need to invest will depend on your age. You can contribute less money to retirement savings in your 20s because you have more time to accumulate wealth. You can also make more risky investments with a higher growth rate because you are investing long-term. As you get older, you will have to save more money every month to reach $1 million for retirement.

It is never too late to start saving for retirement. A worker can even start at 50 and accumulate a decent nest egg. However, to reach $1 million or more and have enough to retire, you should start younger.

This chart shows the power of compound interest and investing early. It shows how much money you will accumulate if you invest $250 a month starting at age 25 and assumes an 8% average annual return. 

Start at 25: You’ll accumulate $878,570 by age 65

Start at 35: You’ll accumulate $375,073 by age 65

Start at 45: You’ll accumulate $148,236 by age 65

The earlier you start investing, the more likely you will reach your financial goals.

Make a Budget

It’s worth it to create a simple budget to minimize your expenses. The difference between your monthly income and expenses is the amount you can save and invest per month.

First, figure out your monthly net income, which is your after-tax pay and all of your fixed and variable expenses for the month. Since variable costs can be more challenging to track, calculate the monthly average over the last 12 months. Try to budget to zero so that your income equals your expenses, and every dollar is accounted for.

If you struggle with making a budget, one helpful rule of thumb is the 50-30-20 Budget Strategy.

Other Budget Factors

Discretionary Spending

Discretionary spending is money used for non-essentials such as entertainment and fulfilling ‘wants, not needs.’ The best way to determine which discretionary expenses to cut out is to rank them in order of importance, making it easier to narrow down the purchases that matter to you. 

Priority still must be given to monthly expenses, debt repayment, and savings before non-essential spending. 

Emergency Fund

Paying into an emergency fund every month is a critical investment. This fund is separate from a savings account and is used only for unforeseen expenses. For example, if your car unexpectedly breaks down or you lose your job, the money in this fund would cover those bills. 

Americans have quickly realized the importance of an emergency fund. For example, 51% of survey respondents said that an emergency fund is now a higher financial priority than before the pandemic started.

A typical rule of thumb is to save three to six months’ worth of your expenses in this account. This also ensures that you don’t dip into your retirement funds when you have an emergency. 

Automate Your Savings

It’s best to set up an automatic transfer from your checking account to your savings account as soon as your paycheck is deposited.

401(k) Employer Matching Programs

Many companies have a matching retirement contribution plan. Ask your human resources (HR) or payroll department about setting up an automatic deduction of pre-tax income amounts each pay period to go towards your retirement savings. If your employer matches, for example, up to 6% of your salary, make sure you direct at least 6% of your paycheck to the retirement plan.

As your salary grows, so will your employer contributions up to a limit, and so will your retirement savings. One approach that works is create a lazy retirement portfolio with passive index funds with little upkeep.

Operate your budget for at least three months and then evaluate your progress. The key to a successful budget is a solid commitment to the tracking process and consistency to help you reach your financial goals.  

Consider a Side Hustle

To help you achieve your goal of saving $1 million for retirement, consider a way you can make some extra money aside from your full-time career. According to a survey of 2,001 adults over the age of 18, one in three or 34% currently has a side hustle. In addition, making extra money on the side to pay off debts or meet short-term or long-term financial goals is a growing trend.

$1 Million Enough to Retire May Not Be Enough

An increasing number of people are retiring with one million dollars in savings, and many people still in the workforce are striving to achieve this goal. Of course, whether $1 million is enough to retire or not depends on your circumstances and expenses, but this dollar amount can be a good goal. Alternatively, save and invest for a higher amount, and retire with $2 million, a feasible amount.

Determine your financial goals, create a sound budgeting plan and start saving now to help you retire with the comfort and security we all hope to experience in the next chapter of our lives.

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