Do you need $1M to retire?
Determining how much to save for a comfortable retirement is challenging — and achieving that goal may be even more difficult. A traditional financial rule of thumb is that you ought to have $1 million set aside for retirement. But this rule may be outdated as you might need much more to support the retirement of your dreams.
How much is enough?
Based on the research by Schwab Retirement Plan Services poll, the average American requires approximately $1.9 million to retire comfortably. Generally, these figures are out of reach for most Americans, grounded on the average retirement savings of around $168,000.
As it turns out, one million dollars does not last as long as most Americans may believe. Needing more than $1 million is especially true for individuals living in expensive states such as New York or Hawaii, where you probably need to triple this amount. While in most states, $1 million will not even cover the daily living expenses of a married couple.
Why $1 million is not enough
Inflation is why $1 million is no longer enough for retirement. All the costs you are used to paying today will cost more tomorrow, including food, housing, and healthcare. Although the average annual inflation rate fluctuates yearly, in the United States, the average increase annually is 3.8 %. Inflation means a $1 million retirement fund in 20 years will be worth less than $300,000 in 2030.
In addition to inflation, many pre-retirees underestimate their expenses once they retire. While many couples will have paid off their mortgage and other debts, you must account for new costs. To estimate how much money, you’ll need each year in retirement savings, consider the following factors:
- Lifestyle – Will you take up any new hobbies or begin traveling?
- Longevity – How many years will you need retirement income?
- Geography – If you plan on moving, how will your cost-of-living change?
- Health care – Have you saved to cover future medical expenses?
- Long-term care – Will you pay for long-term care insurance or self-fund?
Retirement planning is a huge decision that you’ll never really regret making. For many, retiring comfortably means you will need more than just $1 million. But it’s essential to start planning early, so you can make the most informed decisions possible.