6 months ago
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Becoming a millionaire is often synonymous with becoming rich, but does that mean a $1-million nest egg frees you from financial worries about retirement?
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The answer is: It depends. While $1 million may be enough for some seniors, it could also fall short. A study from Northwestern Mutual found U.S. adults believe they will need $1.46 million in savings to retire comfortably.
Say you’re 58 years old and your retirement account has hit seven figures. You may be tempted to stop saving because of it. But don't do that until you've done the math and considered these important factors that could affect how far your money goes.
How much can you actually spend a year?
The first big thing to realize is that having a $1-million nest egg doesn't mean you have a million dollars to spend right away. This money must last you for the rest of your life, so you can only use a little bit at a time. Most of it needs to stay invested, continue earning returns, and wait to support you later in life.
One popular guideline says your balanced portfolio will last 30 years if you limit your withdrawals to 4% of your balance in the first year and then adjust your withdrawals to keep pace with inflation. Assuming you follow this rule, $1 million in savings produces $40,000 a year to live on. Now, this will combine with Social Security, but on average Social Security benefits only replace about 40% of pre-retirement income.
Another rule of thumb says you'll need 80% of your pre-retirement income per year in retirement. Ask yourself if $40,000 is going to be enough to supplement your Social Security benefits, as your withdrawals should ideally replace another 40% of your pre-retirement earnings. If you were making $60,000, you're in great shape. If you were making $150,000, you would fall short.
Read more: Rich, young Americans are ditching the stormy stock market — here are the alternative assets they're banking on instead
How will inflation affect your spending power?
There's also another very important — and often overlooked — factor to consider: inflation. Inflation has hit hard in recent years, sending prices skyrocketing. Still, while post-COVID inflation surges aren't common, prices are always going to go up over time.
