I Used to Think I Needed $1 Million to Retire Comfortably. Here’s What Changed My Mind.
One of the reasons why people find it difficult to save for retirement is that it is difficult to set an end goal.
If you’re trying to buy a $40,000 car, you need to save $40,000. It’s pretty simple. But there’s no set cost for retirement, so it’s difficult to calculate how much savings you’ll actually need.
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When I first started saving for retirementI told myself that over time I would aim for $1 million. But I realized that $1 million probably wasn’t going to buy the kind of retirement I wanted. And you may feel the same.
I want to be clear that $1 million is a pretty respectable amount to have in a year. IRA or 401(k). However, when we break down $1 million based on annual income, this figure may not be as much as you think.
If we apply the 4% rule to a $1 million egg, the annual income, before inflation adjustments, is $40,000. That’s a reasonable amount of money. But I won’t look for it too much.
Most people with a $1 million IRA or 401(k) now also have Social Security to look forward to. But this may not be a particularly generous retirement income stream.
First, benefits face the risk of widespread cuts. And also, based on today’s average retirement benefit, the typical senior currently receives only $25,000 a year from Social Security.
If we take that $25,000 and add it to the $40,000 you can get from a $1 million egg, that brings us to $65,000. This may be enough to cover basic expenses and even leave some extra money for rest and entertainment.
But let’s also remember how monstrous inflation has been in recent years. So while $65,000 may seem like a reasonable retirement income, it’s an amount that could leave many people facing a serious shortfall if costs continue to rise rapidly.
I don’t have a specific retirement savings goal in mind right now. But I know I wouldn’t be happy retiring on $1 million.
And it’s not because I’m a fancy person. I live fairly modestly now and plan to downsize in retirement to reduce my expenses. I’m also someone who has relatively inexpensive hobbies like reading, hiking and cooking.
But I’m also a realist. I know that healthcare costs can increase in retirement. And I know that even a small, mortgage-free home can come with a lot of expenses.
