Becoming a millionaire seems like a surefire way to live comfortably in retirement, but is it really?
More than a third of millionaires say it will take a miracle for them to have a secure retirement. That’s according to the 2021 Natixis Global Survey of Individual Investors, which polled 1,617 people who have accumulated at least $1 million in investable assets.
Rising inflation and a shaky stock market have made even those with large nest eggs nervous about the future. However, some financial experts say not to worry. “It’s all about having an income plan rather than an asset plan,” according to Michael Foguth, president and founder of Foguth Financial Group in Brighton, Michigan.
Those who have pensions, Social Security and annuities may find that they are able to cover expenses with that income, and savings becomes just the icing on the cake.
Factors such as housing and health care will also impact your budget and determine whether $1 million is the right savings goal for your needs. Keep reading to learn more about how to answer the question: Can you retire on a million dollars?
Is $1 Million Enough to Retire? Factors to Consider
How long will a million dollars last in retirement depends on the following factors:
— Geography.
— Longevity.
— Lifestyle.
— Health care.
— Long-term care.
— Retirement income.
— Asset mix.
— Investment risk.
— Inflation.
Geography:Costs can differ dramatically throughout the country, and where you live could determine whether you can successfully retire with $1 million. Financial website GOBankingRates analyzed average expenses from all 50 U.S. states to see how long $1 million would last in retirement. It found retirees in Hawaii would deplete $1 million in just under 11 years, while the cash would last more than 25 years in Mississippi.
Longevity:While no one knows exactly how long they will live, people can make an educated guess based on their health and family history. Those who might live well into their 80s, 90s and beyond may find $1 million isn’t enough.
Lifestyle:Retirees need to make smart spending choices, and those who choose an expensive lifestyle will need more cash in their nest egg. “How much you spend is a huge factor,” says Tyler Ozanne, a certified financial planner with Probity Advisors in Dallas. While retirees may not have much say in some factors listed here, discretionary spending is something completely within their control.
Health care:The 2022 Fidelity Retiree Health Care Cost Estimate found an average 65-year-old couple retiring this year can expect to spend $315,000 on health care costs in retirement. “The hope is that Medicare will be there and be sufficient for people,” says Barbara Taibi, tax partner with Eisner Advisory Group in Iselin, New Jersey. But the reality is that even Medicare comes with out-of-pocket costs that can add up. Healthy seniors may have lower expenses and find that helps their retirement savings last longer.
Long-term care:The Fidelity estimate doesn’t include long-term care, which could cost more than $100,000 a year for a private nursing home room, according to the 2021 Genworth Cost of Care survey. Medicare won’t pay for long-term care, and a couple without long-term care insurance may find that a nursing home stay leaves a surviving spouse with few assets to pay for the remainder of their retirement.
[Read: How to Pay for Nursing Home Costs.]
Retirement income:Most people won’t be living exclusively off their savings in retirement. Those with average spending — which was roughly $52,000 for those age 65 and older in 2021, according to government data — may not need much in savings to supplement Social Security and pension income, according to Ozanne. Even those who don’t receive a pension may be able to replicate those payments by purchasing an annuity.
Asset mix:How you have that $1 million saved could also have an impact on how long it lasts. “You can’t have $1 million in cash and expect that to get you (through retirement),” according to Taibi. Ideally, it will be invested in a way that keeps up with inflation. Likewise, she says having $1 million invested is different than having $800,000 in home equity and $200,000 in a portfolio. Money kept in real estate is not liquid, and there are costs associated with real property that can offset its value.
Investment risk:Retirees also need to take a close look at their portfolio if they want to know the answer to how long $1 million will last in retirement. “It’s all about how you have it invested,” Foguth says. Investing aggressively puts money at risk for losses but being too conservative can mean savings don’t grow enough to offset inflation and withdrawals.
[See: 11 Tips for Retirement Investing.]
Inflation:After years of near-zero inflation, prices for many products have skyrocketed this year. That’s something retirees should be prepared for. A rising inflation rate will erode the purchasing power of money and result in retirees burning through their savings faster.
All these factors make it difficult to create a universal rule of thumb for retirement savings. While some people may be able to live comfortably in retirement on less than $1 million, others will need significantly more.
Impact of Inflation on Retirement Savings
Of all the factors above, inflation may be foremost on many people’s minds today. Prices in the past year have increased at a rate not seen in 40 years, and that can mean retirement savings don’t go as far as they would otherwise.
“Retirees may need to withdraw more of their retirement accounts just to pay living expenses,” Taibi says, “and those planning to retire in the next few years may need more to live on, and therefore have less excess to put away for retirement.”
However, for younger workers, the news is better. “What we’re experiencing right now is not sustainable long-term,” Foguth says.
Over the course of a career, high inflation years like 2022 are balanced out by low inflation years — such as 2015, when average annual inflation was near zero. “The average inflation rate over a long period of time is 3%-3.5%,” according to Ozanne. As long as workers have calculated that level of inflation into their savings goal, they should be well-positioned for retirement, as far as the rising cost of living is concerned.
How to Determine the Right Amount to Retire on for You
Rather than rely on a rule of thumb to determine how much to save for retirement, financial planners advocate for a more nuanced approach. “I think you have to have a more personalized number,” Taibi says.
That means taking the following steps to determine how much to save for retirement:
1. Estimate guaranteed retirement income from sources such as Social Security and pensions.
2. Calculate expected expenses based on debt and lifestyle choices.
3. Determine any shortfall that will need to be covered by retirement savings.
Retirees need to be sure they are including smaller items such as gifts, vacations and home décor in their calculations. Those items can quickly add up, and all spending needs to be considered to calculate an accurate retirement savings goal.
[READ: How to Manage Holiday Spending in Retirement.]
How much people plan to withdraw from retirement funds each year should also factor into setting retirement savings goals. One common rule of thumb is to withdraw 4% from retirement funds each year. Four percent of $1 million provides $40,000 each year for retirement spending. If you can’t imagine living off $40,000 a year plus Social Security, it’s time to reconsider your savings goal.
“In a year with high inflation and a lower stock market, retirees and close-to-retirement individuals may need to make some tough choices — work a little longer, go back to work, spend a little less and put off some big ticket items,” Taibi says.
If all this feels overwhelming and confusing, find a financial professional who specializes in retirement planning. They have both the experience and software to make calculations on behalf of clients.
How to Get to $1 Million in Savings
While $1 million may seem like a lot of money, compounding gains from investments means this number is within reach even for those with relatively modest incomes.
“For young people, it’s quite easy: just do it,” Foguth advises.
Young workers with relatively few expenses should make retirement savings a priority before life events such as marriage, children or homeownership chip away at their extra cash. Some employees may also have the option of a professionally managed 401(k) account. Although there are no guarantees, a properly managed account could result in better returns balanced with an appropriate level of investment risk.
A 25-year-old would need to save approximately $400 a month to achieve a $1 million balance by age 65, assuming a 7% annualized return on the investment. While that may seem like a lot, workers with a 401(k) may receive automatic contributions to their retirement plan from their employer. Many companies also match employee contributions. Both can quickly add to retirement savings.
But even compounding gains has its limits. “It’s probably not as doable if they have waited until their 50s to start saving,” Ozanne says. “My advice for someone who hasn’t started earlier is to temper your expectations.”
Other strategies to boost savings include minimizing taxes, cutting expenses and looking for low-fee investment options. However you reach your goal, with careful planning and expert guidance, you may be able to stretch your $1 million or more across a retirement that is decades long.
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Can You Retire on $1 Million? Here’s How Far It Will Go originally appeared on usnews.com
Update 11/29/22: This story was published at an earlier date and has been updated with new information.
