The median home now costs $350,000, and you’ll spend around $50 just to get a couple of pizzas delivered to that home with tax and tip. With the price of life so painfully high, you might assume that you’d need at least a million bucks just to scrape by in retirement.
But if that’s how you feel, you’re part of a small minority.
Despite the post-pandemic era of inflation and the rising cost of just about everything, most people are still optimistic that a six-figure nest egg will cut it in their golden years. A new GOBankingRates survey of more than 1,000 adults found that nearly three-quarters of the country feels confident that they can retire comfortably on less than $1 million.
But are they right?
Three Out of Four Are Fine With Six Figures
The study found that 74% think they’ll be able to live out their retirement dreams on less than $1 million.
About 22% think they can pull it off with less than $250,000, while 26% (for each range) anticipate needing either $250,000-$500,000 or $500,000-$1 million.
After that, it tapered off to a little fewer than 10% who would be confident with $1 million to $1.5 million, 8% who expect to need up to $2 million, 5% who think they’ll need up to $3 million and a high-rolling 4% who will need even more.
Men were a little more likely than women to aim high, and there wasn’t much variation between the age groups, which is surprising, considering $1 million will buy much less when today’s young adults retire than it can for the baby boomers who are already over or near the finish line.
Are the Masses Optimistic or in Denial?
Several experts who spoke with GOBankingRates were surprised at how many people were confident they could retire on less than $1 million.
“I think this statistic reflects a disconnect between expectation and reality,” said Dennis Shirshikov, professor of finance, economics and accounting at the City University of New York and the head of growth at Awning, a site that helps people support their retirement through real estate investing.
“Many people underestimate the long-term costs of healthcare, increased leisure time — which often equates to increased spending — and the impact of inflation on fixed incomes. But then again, the amount needed varies widely depending on your situation,” Shirshikov said.
So, If Not $1 Million, How Much Do I Need?
Shirshikov’s final point illustrates the flawed logic of citing dollar figures — anyone can pick $1 million or any other arbitrary number out of a hat, but all numbers are meaningless if a plan didn’t lead you to them.
“The amount of money you need to retire really depends on what your expenses are, what age you retire and how long you will live,” said Kendall Meade, certified financial planner at SoFi.
“The best way to know what you need to comfortably retire is to have a comprehensive financial plan run — taking into account other sources of income you may have, inflation, health care costs and more,” Meade said. “This can give you the opportunity to see if you are on track or if any changes are needed before making any irreversible decisions, such as leaving the workforce permanently.”
Your Plan Determines Your Expenses, Your Expenses Determine Your Number
The plan run that Meade described provides a snapshot of your income, expenses and other factors determining how much you expect to spend every month in retirement. Only then can you identify your ideal nest egg — whether it’s a million bucks or not.
“A common rule of thumb is that you can safely withdraw 4% of your investment portfolio in the first year of retirement and adjust it for inflation in subsequent years without outliving your money,” said Meade. “It is important to keep in mind that this rule of thumb came from a research study that analyzed rolling 30-year historical periods to understand the maximum sustainable withdrawal rate for someone living for 30 years in retirement.”
Meade also noted that the rule is based on a 50/50 portfolio, where half of the retirement assets are invested in equities with the other half in fixed income.
According to Meade’s calculations in line with the 4% rule, the following annual spending amounts require the corresponding combined nest eggs to back them up:
- $40,000 a year: $1 million
- $50,000 a year: $1.25 million
- $75,000 a year: $1.875 million
- $100,000 a year: $2.5 million
So, $1 Million Might Be Enough — But Maybe Not?
It’s important to remember that the spending figures Meade outlined represent only the amount retirees need to withdraw from their portfolios each year — and those numbers typically don’t exist in a vacuum.
“So it does not include Social Security, pensions or any other income you may receive,” said Meade. “So for those who have other sources of income and low expenses, you may be able to retire on less.”
For example, with an average monthly benefit of $1,839, the typical Social Security recipient can add more than $22,000 to their annual income estimations, dramatically reducing the size of their necessary nest egg.
So, are the 74% right to think they can get by on six-figure savings? That, of course, depends.
“While having $1 million saved up for retirement can be a good goal, it might not be right for everyone,” said Baruch Silvermann, CEO of The Smart Investor. “The amount you need for retirement can vary a lot depending on where you live, how you want to live during retirement, any other money you’ll have coming in and when you plan to retire.”
What’s a Million Bucks, Anyway?
The key is to put the value of a seven-figure sum in perspective in regard to what it can buy today and how it can dwindle over time.
“It’s important to understand that $1 million in cash is roughly the same as owning two to three real estate properties,” said Silvermann. “So if you already have some assets like a house or investments, you might not need a full $1 million in cash. Some people think they don’t need that much money because they don’t consider future inflation, which makes money less valuable over time. They just look at the buying power of $1 million today and underestimate how much they’ll really need in the future.”
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