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Can You Retire on $1 Million?

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By anyone’s standards, $1 million is a lot of money. In fact, if you had $1 million in dollar bills, it would literally weigh a ton and take you about 12 days, nonstop, to count it all.

For a long time, a $1 million nest egg was regarded as the measure of retirement planning success. It was enough to provide for you in style during retirement and leave an impressive legacy. But lately, the image of the $1 million nest egg has begun to tarnish. Now it’s common to find articles like “How to Get By on $1 Million in Retirement,” complete with advice about tapping your home equity or retiring overseas to make your savings last.

Is an actual ton of money no really longer enough to get you comfortably through retirement?

$1 Million Almost Gets the Job Done

According to the Bureau of Labor and Statistics (BLS), people age 55–64 spend a little more than $56,300 annually per household on food, housing, clothing, transportation and other lifestyle expenses, including health care. How much will these pre-retirees need to have saved in order to cover these costs without income from work?

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Don’t worry. This isn’t math class. We’ll give you the answer! To cover $56,300 in annual expenses, you’d need about $4,700 each month. Chris Hogan’s Retire Inspired Quotient (R:IQ) tool calculates that you’ll need a nest egg of $1,157,000—a little more than $1 million.

So, the short answer is that $1 million is almost enough for the average person retiring today to pay their bills without income from work.

It’s Possible to Retire With Less

If you’re facing retirement soon but your nest egg is coming up a little short, there are ways to reduce your expenses and make a smaller amount of savings work without giving up your home or moving overseas.

Housing, for example, is by far the largest expenditure both before and after retirement, so any savings in your housing budget will go a long way toward filling your savings gap. According to BLS figures, 56% of people approaching retirement still have a mortgage, with an average monthly payment of $766—a total of more than $9,000 a year. If you still owe on your home, paying off your mortgage before you retire would reduce your annual spending from $56,300 to $47,300.

That will also reduce the amount you’ll need to have saved for retirement from $1.15 million to $972,100. But be careful of cutting it too close. Other factors like travel, taxes and time can affect how much you’ll actually need to make ends meet over 30 or more years of retirement. 

How Often and Where Do You Want to Travel?

The BLS report on older Americans’ spending patterns includes a category for entertainment, but it is a modest amount—$3,000 a year for the age group that spends the most. If you’re looking forward to a lot of travel in retirement, $3,000 won’t get you far. Your options are to boost your retirement savings, reduce your spending in other categories, or keep a part-time job to fund your adventures.

How Will Taxes Affect Your Savings?

Income taxes have the potential to really trip you up in retirement, especially if all of your retirement savings are in tax-deferred accounts like a 401(k) or IRA. The money you withdraw from those accounts in retirement is subject to income taxes, just like the income you earned from your job.

For example, based on today’s tax rates, if your annual expenses total $56,300, you’ll need to withdraw $75,000 a year from your savings in order to pay your taxes and have enough left over to cover those costs.

Because you’re withdrawing more, you’ll need to have more saved to avoid running out of money during retirement. In this case, you’d need more than $1.5 million in savings, according to the R:IQ tool.

If your savings is in a tax-advantaged account like a Roth IRA or a Roth 401(k), income taxes will have less of an impact since you won’t owe income taxes on any or most of the money you withdraw from those accounts.

Either way, it’s important to consult your tax and investing professionals to help make sure your tax bases are covered.

How Long Until You Retire?

Remember that our calculations are based on someone planning to retire today. If retirement is several years or even decades away, the picture can change drastically. For example, to cover the same $56,300 in expenses 25 years from now, you’ll need to have saved more than $2.2 million, thanks to inflation.

Don’t have $2 million? Don’t panic! You have plenty of time to build up your savings, but you need to make it a priority—starting today! Work with an investing professional who will help you make the most of your time and money now and keep your plan on track over the next quarter century—or more—of investing.

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