Is $1 million enough for retirement?

 

For some of them, retiring with $1 million in savings may be profitable. But does a nest egg of that size really mean you'll live out your retirement on the easy street? As it turns out, not necessarily.

The good news is that if you have financial assets in the seven figures, you are significantly better off than most Americans. According to a survey by the National Institute on Retirement, the average household just a few years away from retirement has only 14.500 dollars put away. That number jumps to $104, 000 for the 55 to 64 age group with retirement accounts, but it's still far from $1 million.

Now for the sobering part: In today's low interest rate environment, your assets won't last as long as they once did.

The 4% rule, modified

Before the Great Recession, it was common for financial advisors to talk about the "4% rule" Talked about when they discussed withdrawals from retirement accounts. Older adults, they said, could take away 4% of their nest egg in the first year after leaving their jobs. They could repeat that amount in each subsequent year – meaning a slight increase for inflation – with the reasonable belief that they would not outlive their money.

But now bonds, the cornerstone of many retirement accounts, pay so little that account balances don't grow as much. In fact, Wade Pfau, an economist at the American College for Financial Services, estimates that today's portfolio with an even mix of stocks and bonds will produce an inflation-adjusted return of less than half the historical norm.

Now retirement experts like Pfau cite a "3% rule" for retiree withdrawals. That can have a significant impact on living standards. (See also: Why the 4% rule for retirees no longer works .)

The Interest Rate Effect

For example, consider a recently retired couple with a combined savings of $1 million. Let's assume each spouse earned 75 during their working years.000 per year, resulting in a total income of 150.000 $ led. If they were to take 4% of their assets in the first year, they could take 40.Withdraw $ 000. But by dropping that allowance to 3%, they would limit themselves to $30, 000.

Of course, they can add to that amount any income they receive from pensions, as well as their Social Security retirement benefits. According to the Social Security Administration, our example couple would pay for annual payments of just over 40.Qualify $ 000. So, aside from retirement income, they're looking for about 70.000 to live. In this case, that's nowhere near the 70% or 80% of pre-retirement wages that many financial planners point to as a target.

Now, what if that same couple saved twice or even three times as much? Suddenly their future looks brighter. A 3% dip in the $2 million retirement plan will result in a revenue stream of 60.000 dollars in the first year of employment. Add to that the 40 or so.000 dollars that they would receive in Social Security. You now have $100, 000 annually.

A $3 million nest egg gets them in even better shape. Here they can comfortably withdraw $90, 000 per year when they retire, adjusting that amount each subsequent year to keep up with inflation. Social Security puts them over the 130 mark.000 dollars beyond, close to the income they received during their working years.

The importance of budgeting

Does this mean everyone needs $3 million to enjoy a stress-free retirement? Well, no. There are many variables in play, which is why the goal of bringing in 70% to 80% of what you made as a full-time employee is just a rule of thumb.

One factor that has a big impact is where you put your money away. For example, if you put most of your money into a tax-free Roth account, you may be able to live on much less of it. Since none of the money you pull from these accounts goes to the IRS (assuming you follow Roth withdrawal rules), every dollar you withdraw is worth more than you would have in a taxable or even tax-deferred vehicle. (See also: What are the Roth 401 (k) withdrawal rules?)

Your retirement lifestyle will also have a big impact. Plan to travel extensively or join an expensive country club? If so, you may need to increase your target retirement income. But if you intend to downsize your home and pursue more frugal pursuits, you may be able to live on much less than you once did.

To get an accurate picture of how much you will need in retirement, a detailed budget is essential. A good financial advisor should be able to help you determine the likelihood that your portfolio will be able to support your lifestyle needs. (See also: the 4 phases of retirement and budget for them .)

Handling long-term health care

Another point to keep in mind is that your health can significantly affect your expenses. later in life. This is where resigning with just enough to crawl with can be a risky proposition.

Research from Genworth Financial concludes that the average cost for those in assisted living facilities is now $43,539 per year. And that number increases considerably if you need the more costly care of a nursing home. There, even a semi-private room now costs an average of $82, 125 per year.

While not everyone will end up in one of these facilities, many Americans purchase long-term care insurance just to be safe. The problem is that this protection in itself can be enormously expensive. A typical 65-year-old will have to pay more than $3, 000 a year for $276, 000 of coverage, according to the American Association for Long-Care Insurance.

But if you retire with more money than you need immediately, you can do without these additional costs. By saving extra for retirement, you can essentially self-insure and tap that money only when it's actually needed.

The Bottom Line

It can seem a lot to save a million dollars by the time you retire. But when you consider how long it can take, and the fact that today's low interest rates are dragging down investment returns, a more sober picture emerges. Depending on how you plan to spend your later years, it may take $2 million or even $3 million to make your ideal lifestyle a reality.