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 to count it all.
I talk with a lot of millionaires in my travels and, for a long time, a $1 million nest egg was the measure of retirement planning success. It was considered enough to enjoy a dream retirement and leave an impressive legacy. But lately, the image of the $1 million nest egg has begun to fade. 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.
So what’s the deal here? Is an actual ton of money really not enough to get you comfortably through your golden years? Let’s break it all down.
$1 Million Is a Good Start
Okay, research shows Americans close to retirement age spend about $66,000 annually per household on food, housing, clothing, transportation and other lifestyle expenses including health care.1 How much will these folks need to save in order to cover these costs without income from work?
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Don’t worry. This isn’t math class. I’ll give you the answer! To cover $66,000 in annual expenses, you’d need about $5,500 each month. If you want to retire 10 years from now, my free Retire Inspired Quotient (R:IQ) tool calculates you’ll need a nest egg of over $1,730,000. Keep in mind that number may change depending on your rate of return, withdraw rate and inflation—details you can customize in your RI:Q.
So, the short answer is that $1 million is a good start for the average person retiring today to pay their bills.
It’s Possible to Retire With Less
Now you may be thinking, Chris, that’s great. But I’m nowhere near $1 million. I hear you. If you’re facing retirement soon and your nest egg is coming up a little short, don’t give up. There are ways to cut 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 expense both before and after retirement, so any savings there will go a long way toward filling your savings gap.
According to the Bureau of Labor Statistics, 58% of homeowners between the ages 55 and 64 still have a mortgage.2 That’s more than half! Folks, we can do better. Their monthly mortgage payments would be around $1,010, which adds up to a little more than $12,000 per year.3 And we’re not even talking about maintenance, home repairs and other housing costs.
You’ve heard me say this before, but that’s why paying off your mortgage before you retire can be a game changer and dramatically reduce your spending in retirement by thousands of dollars each year.
If you can find some other places to lower your expenses, your nest egg doesn’t have to be as big. But be careful about cutting it too close. Other things like travel, taxes and time can affect how much you’ll actually need to make ends meet over 30 or more years of retirement. So start cutting with a scalpel before reaching for the chainsaw!
How Much Do You Need to Retire?
Okay, it’s time to get serious for a second. As mentioned earlier, the first step is to know your retirement number. You may plan to spend only $40,000 a year, or you may be used to an income of over $100,000 with no plans of cutting back in your golden years. There’s no wrong answer—only your answer.
How much money you need in retirement depends on your goals, your tax situation and how much time you have until you stop working. Are you sensing a theme here? It’s up to you to define your retirement dream. But remember: A dream without a plan is just a wish, so you need to create a plan to make it happen.
Let’s dig into some of the most important factors that can affect your retirement expenses.
Where Do You Want to Travel and How Often?
Many Americans who are approaching retirement dream about seeing the world and making time for hobbies and relaxation. But right now, Americans age 55 and older only spend a modest $3,350 on entertainment each year on average.4 If you’re looking forward to a lot of travel in retirement, $3,350 won’t get you very far—think Paris, Texas, instead of Paris, France.
But you have some options. You can 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?
Uncle Sam takes his share in retirement, and income taxes have the potential to really trip you up—especially if all your retirement savings are in tax-deferred accounts like a 401(k) or traditional 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, if you’re planning on spending $66,000 in household expenses this year, you’ll need to withdraw a few thousand dollars extra 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, if you’re retiring 10 years from now, you’d need just over $1.7 million in savings, according to the R:IQ.
Now, if you’re saving in a tax-advantaged account like a Roth IRA or a Roth 401(k), that’s a whole different ballgame. With the Roth options, your contributions are made with after-tax dollars. That means you won’t owe income taxes on any or most of the money you withdraw from those accounts. I don’t know about you, but I just took a huge sigh of relief right there!
Keep in mind that you may pay taxes on your Social Security benefits, depending on your situation. That’s why it’s always a good idea to consult a tax pro to help make sure your tax bases are covered.
How Long Until You Retire?
Remember, these numbers are based on someone planning to retire soon. If retirement is decades away, the big picture changes drastically. For example, to cover the same $66,000 in expenses 25 years from now, you’ll need to have more than $2 million, thanks to inflation. And that’s assuming you were saving in a Roth 401(k) or a Roth IRA, which are tax-free in retirement.
Don’t have $2 million? Don’t worry. If you’re in your 20s and 30s, you have plenty of time to build up your savings. But you need to make it a priority—starting today! Remember, the earlier you start investing, the more time your money has to grow.
And if you feel like you’re a little late to the game, don’t panic. You still have time to make a difference in the size of your nest egg. Start by meeting with an investing pro who can help you come up with a plan to reach your retirement goals. It’s time to get to work!
It’s Possible to Retire an Everyday Millionaire
Hear me loud and clear on this. I’ve talked to many folks who think just reaching the $1 million mark is a fairy tale meant for someone else. They hang their head and believe they need a six-figure salary or a massive inheritance in order to reach millionaire status.
But here’s the thing: They’re wrong. For my new book, Everyday Millionaires, we completed the largest study of millionaires ever and found that 79% of them didn’t inherit a dime. On top of that, one-third of the millionaires we talked to never made six figures in a given year!
Do you know how millionaires actually built their wealth? They take personal responsibility for their finances. They consistently invest in their 401(k)s and IRAs year after year. They believe their destiny—good or bad— is in their hands.
Anyone in America can retire a millionaire today—and that includes you!
Find an Investing Pro
Everyone has a different financial situation with unique plans for their retirement years. There’s no easy answer for how much you need to retire. The truth is the number looks different for everyone. That’s why you need an investing pro on your team.
An investment advisor can help you come up with a customized plan based on your current financial picture and your goals for the future. Trust me, I know all about investments, but even I meet regularly with an investing professional!
Need help finding a financial advisor? Our SmartVestor program can connect you with investing pros in your area who can help you and keep your plan on track so you can feel secure about your retirement future. Find your investing pro today!
About Chris Hogan
Chris Hogan is a #1 national best-selling author, dynamic speaker and financial expert. For more than a decade, Hogan has served at Ramsey Solutions, spreading a message of hope to audiences across the country as a financial coach and Ramsey Personality. Hogan challenges and equips people to take control of their money and reach their financial goals through national TV appearances, The Chris Hogan Show, and live events across the nation. His second book, Everyday Millionaires: How Ordinary People Built Extraordinary Wealth—And How You Can Too, is based on the largest study of millionaires ever conducted. You can follow Chris Hogan on Twitter and Instagram at @ChrisHogan360 and online at chrishogan360.com or facebook.com/chrishogan360.