How much do you think experts would recommend saving for retirement? Our recent survey revealed that roughly 60% of respondents believed experts would recommend saving no more than $1 million — with 20% answering less than $500,000.
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However, the remaining 40% who believed experts would recommend saving more than $1 million are probably right. Here’s why.
Reasons Why a $1 Million Nest Egg May Not Be Enough
Julian B. Morris, CFP at Concierge Wealth Management, says, “$1 million likely isn’t enough for retirement anymore because the cost of living has continued to rise from previous generations.” Plus, “human beings are living longer, so $1 million needs to last for a longer period to cover healthcare expenses.” And lastly, “Social Security is expected to be depleted in the early 2030s, which means if you’re planning to retire after that, you may not receive the full benefit you’re promised or any benefit at all.”
All this being said, Morris emphasizes that it’s still possible to retire with $1 million as long as you maintain a strict budget and live below your means. However, if you want to enjoy your golden years without worrying about running out of retirement funds, you may need to stash away more than $1 million.
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How Much Should You Save for Retirement?
Now that $1 million may not be enough for retirement with inflation, healthcare costs and life expectancy increasing, you’ll most likely need a larger nest egg to retire comfortably. So, how much should you save instead? Unfortunately, there’s no one-size fits all answer.
According to Fidelity Investment, you should aim to save 10x your pre-retirement salary by 67. So if you make $150,000 a year, you’ll need a $1.5 million nest egg. However, many other factors, such as your cost of living, tax bracket and retirement age, can also affect the amount you need.Let’s examine these factors further.
1. Lifestyle in Retirement
To determine how much you need to save for retirement, you must first know what your lifestyle and expenses would look like during your retirement years. Do you plan on traveling the world with your spouse and staying at luxury resorts? Or do you plan on moving to the countryside and living a frugal yet peaceful lifestyle?
The ideal size of your nest egg can also vary significantly depending on which part of the country you plan to settle down. For example, a $1.5 million retirement fund may not stretch as far in major cities like New York and Los Angeles compared to smaller towns in North Carolina or Ohio.
2. Taxes
Let’s say you’ve built a $2 million nest egg in your 401(k) — which is made with pre-tax dollars. If your tax bracket in retirement is 40% between federal and state, then your $2 million is worth closer to $1.2 million after taxes. On the other hand, since Roth IRA contributions are made with after-tax dollars, you can make withdrawals tax-free during your golden years, which means you get to keep the entire $2 million in your savings.
Remember, even if you don’t use retirement savings accounts and instead invest in the stock market, your brokerage account will be subject to capital gains taxes — which is either 0%, 15%, or 20% on most assets held for longer than a year.
So, whether you invest in the stock market or save in a retirement savings account, consider the tax implications to help you better plan for retirement.
3. Your Desired Retirement Age
When it comes to retirement planning, your desired retirement age can significantly impact how much you need to save. The sooner you retire, the more money you’ll need to save to support yourself through your retirement years.
Let’s say you want to retire early at 40. That means your nest egg will need to cover around 40 to 50 years’ worth of expenses, depending on your life expectancy. If you want to maintain a decent standard of living during your retirement years, your nest egg may need to be at least $2 to $3 million.
On the other hand, if you plan to retire at 65 (the most common retirement age), you’ll have approximately 20 to 25 years in retirement, which means you could contribute less money to reach your retirement savings goal.
Tips for Building a Nest Egg
Here are some actionable tips to help you build a solid nest egg so you can enjoy your retirement years without stressing about money.
Automate Your Savings. Rather than relying on memory or willpower, automating your savings allows you to consistently put money away without even thinking about it. So, if you haven’t already, set up automatic transfers from your checking account to a retirement savings account.
Set a SMART Financial Goal. SMART stands for specific, measurable, achievable, relevant and time-bound. Instead of vaguely saying, “I want to save for retirement,” setting a SMART goal forces you to set achievable targets with specific deadlines.Here’s what a SMART goal could look like: To retire by 65 and reach my savings goal of $1.4 million, I will set aside $11,000 a year, which translates to around $920 a month. I will make sure I achieve this goal by automating my savings and using a budgeting app to help me stay on track.
Pay Off High-Interest Debt. Credit card debt, personal loans and other types of high-interest debt can eat away at your savings over time. By making extra payments and focusing on paying down your debt, you’ll free up money to invest in your future. Consider taking out a debt consolidation loan if you’re struggling to keep up with your payments.
Start Saving for Your Future Today
Use our retirement calculator to figure out exactly how much you’ll need in retirement and how much you should save each month to build up your nest egg. If you’re feeling overwhelmed or unsure about where to start, consider speaking with a certified financial planner (CFP) who can guide you in the right direction.
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This article originally appeared on GOBankingRates.com: Why $1 Million Isn’t Enough for Retirement Anymore
As an expert in personal finance and retirement planning, I bring years of experience and in-depth knowledge to shed light on the concepts discussed in the article. My expertise is grounded in a comprehensive understanding of economic trends, investment strategies, and the evolving landscape of retirement planning.
The article raises a critical question about the adequacy of a $1 million retirement nest egg, and it rightly challenges the common perception that this amount is sufficient for a comfortable retirement. The evidence supporting the need for more substantial savings is compelling and aligns with the current economic realities.
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Rising Cost of Living and Increased Life Expectancy: The article correctly points out that the rising cost of living, coupled with increased life expectancy, necessitates a reevaluation of retirement savings goals. I concur with Julian B. Morris, CFP, who emphasizes that $1 million may no longer be enough to cover extended retirement periods and escalating healthcare expenses.
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Social Security Depletion: The mention of the expected depletion of Social Security in the early 2030s adds another layer of complexity to retirement planning. This is a crucial factor that individuals need to consider when estimating their future income sources during retirement.
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Factors Affecting Retirement Savings: The article introduces the idea that the amount needed for retirement depends on various factors. Fidelity Investment's recommendation to save 10 times one's pre-retirement salary by the age of 67 is a sound guideline. However, it is essential to recognize that individual circ*mstances such as cost of living, tax considerations, and retirement age can significantly influence the required savings amount.
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Lifestyle in Retirement: The article rightly highlights the importance of considering one's desired lifestyle during retirement. Different lifestyles have varying financial requirements, and the choice of location, as well as spending habits, can impact the size of the necessary nest egg.
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Tax Implications: The discussion on taxes brings attention to the often-overlooked aspect of retirement planning. Tax efficiency, especially in withdrawals from retirement accounts, plays a crucial role in determining the actual value of savings. The differentiation between pre-tax and after-tax contributions and the impact on the overall savings is a key consideration.
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Retirement Age: The article underscores the significance of the chosen retirement age in determining the required savings amount. Early retirement requires a more substantial nest egg to sustain a longer period of retirement, while a later retirement age may allow for lower annual contributions.
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Tips for Building a Nest Egg: The practical tips provided for building a solid nest egg align with best practices in financial planning. Automating savings, setting specific and measurable goals, paying off high-interest debt, and starting to save early are all fundamental principles that contribute to a successful retirement strategy.
In conclusion, the article effectively communicates the complexities of modern retirement planning and dispels the notion that a $1 million nest egg is universally sufficient. As individuals navigate the intricacies of retirement preparation, a personalized approach considering various factors will be key to ensuring financial security in the golden years.
