Don’t get too hung up on that number.
If you’re in the process of planning and saving for retirement, you may be setting your sights on a $1 million nest egg. For years, that’s been touted as a nice goal to achieve — mainly because it sounds like a large, impressive number.
But before you set your retirement savings goal at $1 million, you may want to stop to consider what that means in terms of annual income. You may come to the realization that a $1 million nest egg will leave you short on cash as a retiree. And the sooner you have that voilà moment, the better off you’ll be.
Don’t bank on $1 million being enough
Ideally, your savings won’t be your only source of income once retirement rolls around. Chances are you’ll get some money out of Social Security — even if benefit cuts are imposed. And you may be willing to work in some capacity, which could lend to additional income as well.
But all told, your nest egg might end up being your primary source of retirement income. And so it’s important to make sure it’s nice and robust. But that doesn’t necessarily mean $1 million will cut it for you in retirement.
For many years, the convention was to plan on withdrawing from your savings at a rate of 4% per year. But that rule has been proven to be outdated. And these days, more and more financial professionals are advising savers to tap their nest eggs at a more conservative rate. This is something you might especially want to do if you expect to live a longer life.
So, let’s say you decide to settle on a 3% withdrawal rate for your savings. If so, that means a $1 million nest egg is only going to give you $30,000 a year of income.
Now when you combine that with income from Social Security and maybe a job, you might land in the $50,000 to $60,000 a year range, which is not a terrible place to be. However, it may not be where you want to be. And so rather than fixate on building yourself a $1 million nest egg, think about the lifestyle you want to uphold in retirement, and figure out how much money it’ll take each year to pull it off.
You may determine that it’ll take $80,000 a year to live the way you want to as a retiree, and that $60,000 of that will need to come from your savings. Based on that number and a 3% withdrawal rate, it leaves you needing $2 million in savings by the time your career wraps up.
Make your own plan
There’s a lot of advice on the internet about saving for a $1 million nest egg. And while that’s certainly a nice amount of money to have, it may not be enough for you.
So rather than assume that you’ll be set with $1 million in savings, figure out what it is you want out of retirement. And then make a plan to save and invest so you’re able to achieve your personal goals.