Today's Retirement Myth: A Million Dollars Is Enough

Million dollars
Million dollars

A 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.