Can you afford to retire if you have $1 million in savings? As with many questions, the answer is “It depends.” Your values, circumstances, and smart planning can make or break a financially successful retirement. Let’s look at the details.
Is $1 Million A Lot Of Money In Retirement?
If you compare yourself to all Americans, having $1 million or more in retirement savings is a lot of money. According to one report, just 3.2% of Americans have more than $1 million in savings.
Digging into the results by age, here are the median retirement savings account balances by age group in 2022:
- Age 45-54: $115,000
- Age 55-64: $185,000
- Age 65-74: $200,000
- Age 75+: $130,000
Source: Survey of Consumer Finances conducted by the Federal Reserve.
If you’re trying to determine if you have enough money to retire, here’s a better question: Is $1 million enough to fund your retirement, given how much retirement income that amount could generate? If you look at it this way, it’s possible you might think $1 million isn’t enough money. Let’s see why.
What Is A Good Retirement Savings Goal Number?
Up until your early 50s, using a simplistic retirement savings goal like $1 million could work OK. However, once you’ve reached your mid-50s, focusing on a specific retirement savings goal isn’t the best way to plan for a financially secure retirement. Instead, you’ll want to spend time analyzing the common-sense formula for retirement security:
- I > E, or income greater than living expenses.
To find out whether your retirement income will be greater than your expenses, you’ll first want to estimate how much retirement income you’ll receive from Social Security, any pensions you might have, and the lifetime retirement income that your savings could generate.
For this last amount, you can get a ballpark idea by applying the 4% rule to your savings amount. In the case of $1 million, 4% is $40,000, which is a rough estimate of the lifetime annual income that $1 million could generate that you could afford to withdraw each year.
However, instead of just looking at one method of generating income from your retirement savings, it would be best to learn about other various methods you can use to generate retirement income from your savings and estimate how much income you could receive from each method. Doing this can help you build your portfolio of retirement income, one that best reflects your goals.
The other key task is to estimate your living expenses in retirement, including housing, food, utilities, health care, and taxes. The goal is to make sure that your estimated retirement income from all sources will cover your living expenses with a margin for surprises and emergencies.
How Much Of Your Retirement Savings Will Go Toward Housing, Food, Healthcare, Etc.?
You’ll spend most of your money in retirement on housing, transportation, healthcare, and food, according to the Bureau of Labor Statistics. Here are the annual averages for these categories:
- Housing: $18,872
- Transportation: $7,160
- Healthcare: $7,030
- Food: $6,491
As you can imagine, the amounts you spend on these items could vary substantially from these averages. Obviously, $1 million will last longer for low spenders vs. high spenders.
State income taxes, property taxes, and housing costs can also vary substantially by state. As a result, $1 million will last longer in a low-cost state vs. a high-cost state.
What Strategies Can You Use To Make $1 Million Last Longer In Retirement?
The common-sense formula for retirement security described above offers guidance for adopting strategies that can make your savings last longer. It also helps you determine if $1 million is enough to fund your retirement. For example, if you’ve earned a substantial pension that contributes to your total retirement income, you’re in a better position to make that $1 million in savings last longer.
Here are other strategies to help make your savings last longer:
- Delay retirement to give your Social Security income time to grow as large as possible and allow your retirement savings to earn more investment income.
- Consider semi-retirement—going down to part-time work—as a way to delay drawing from your financial resources and to help pay for your living expenses.
- Analyze different viable methods of generating lifetime retirement income, including establishing a realistic systematic withdrawal plan with invested assets and purchasing a lifetime income annuity.
- Investigate strategies to reduce your living expenses or at least protect them from costing more due to inflation.
If indeed you’ve saved $1 million or more, congratulations. You’ve done a great job saving money. However, don’t assume you’ll live on easy street in retirement. It will take some homework to make sure your savings will be enough for you.
On the other hand, if you haven’t saved $1 million, don’t despair. You can still plan for a financially secure retirement by using the methods described in this post and exploring all your options for managing your money well.
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