For a long time, $1 million has been considered the gold standard for a secure retirement.
While $1 million may be a reasonable target, others need more. You should not underestimate the challenge of financing yourself for 20 years after retirement. A million dollars in retirement savings will only last you about 19 years on average. Ok, but how much money do you need to retire? The answer depends on your lifestyle and future expenses.
Why A $1-Million Nest Egg May Not Be Enough?
Generally, it is considered that after retirement, people need about 70% to 80% of their pre-retirement income for their expenses. In a lot of cases, the cost of living goes down for retirees. But it is possible for your expenses to rise instead of decline. Here are five possible reasons why $1 million in retirement savings may not suffice:
1. Travelling expenses
You may find yourself with the leisure to visit the place that you have always wanted to. Even though your daily commute expenses will decrease, you must plan ahead for leisure travel as part of your retirement budget.
On average, you may be spending above $11,000 per year, while the income for seniors was $44,051 as of 2017, according to this source. Your vacation plans influence the answer to the question “how much money do you need to retire?” An extensive travel plan may not fit into a $1 million retirement budget.
2. Medical expenses
According to a 2016 study by the Urban Institute and the U.S. Department of Health & Human Services, almost 50% of 65-year-old seniors will be affected by some sort of disability and will need long-term care services. Regular health insurance just won’t cut it for them.
Medicare also only covers short-term nursing home stays and will not help you if you need rehabilitation of some sort. Custodial care will also not be covered by Medicare. In a situation like this, you will exhaust your savings faster than you can imagine.
If you have substantial savings in registered retirement accounts then after the age of 72, you may have to pay a higher tax. That’s because there are no mandatory withdrawal requirements from RRSPs or RLIFs until you turn 71; then, you are required to withdraw a percentage of your registered retirement account, based on the current balance. If you live in the US, and your Social Security exceeds $25,000, you also may have to pay taxes of up to 50% on it. (The good news, as an American taxpayer, is that withdrawals from a Roth IRA, are tax-free.)
4. Increased repair expenses
It is possible that once you retire, you will begin to spend more money on home renovation. Once you start staying at home more, you will realize how many repair jobs you have been putting off. The more you notice things that need to be fixed, the more you want to change your living space. Although you may not have budgeted for these costs, you have to spend money on this sector, whether you like it or not.
According to this CNBC report, a 67-year-old retiree with $1 million in savings today will earn $40,000 in the first year when adjusted for inflation and assuming a 4% interest rate. A 42-year-old will only receive roughly $19,000 from a million dollars when adjusted for inflation. That means any 32-year-old planning to retire with a million dollars will receive an annual income below the poverty line.
The goal of saving $1 million for retirement is not a viable strategy in this context. The plan should always be to live off the interest gained on savings rather than the savings themselves. If you want to maintain a particular lifestyle after retirement, plan for it taking inflation into account.
In my opinion, $1 million is just a number that’s thrown around a lot, but it is not suitable for everyone. What you realistically need for retirement depends on many factors like where you live, what your travel plans look like, and what medical conditions you may have or might develop. You have to consider the taxes you may have to pay on the retirement fund withdrawals. Unexpected repairs, maintenance, renovation, and remodelling costs are also to be kept in mind. And in the context of inflation, a million is not going to cut it.
If you’re still asking “how much should I save for retirement?” then just start investing in a retirement account as soon as possible because catching up is difficult if you don’t save as much as you can in the first half of your career. If you have access to employer-matching retirement programs, such as a defined contribution pension plan or, in the US, a 401(k), try to maximize your investments. Invest in a health savings account (HSA) or an investment account for future medical expenses. You should try your best not to carry debt into retirement. You can consolidate credit card bills and avoid paying off debt with your post-retirement income. Rather than focusing on a magic number, tailor your retirement savings goal to your specific needs.