We cover many different topics and strategies in personal finance, but everything generally maps to one primary goal – having enough money to retire comfortably.
One of the most common numbers that comes to people’s minds when they think about retirement is one million dollars. But what if we told you that $1,000,000 may not be enough in today’s world? With life expectancies increasing and the overall cost of living on the rise, a million dollars doesn’t go as far as it used to.
If you had a million dollars invested and it earned an after-tax return of 4%, it would produce about $40,000/year. This may be sufficient for your lifestyle, but there are many other factors to consider. In this article, we break down what you need to consider when thinking about the question “Is $1,000,000 enough for retirement?”.
Your Lifestyle Plays the Biggest Role
More important than how much you have saved and invested is how much you’ll be spending each year in retirement. Before diving into the numbers, you need to think about what retirement looks like to you. Will you be traveling multiple times per year? Or moving to a different state or country with potentially higher costs of living? Or do you want to donate large portions of your assets? Taking the time to get an understanding of what your retirement lifestyle will look like allows you to begin planning around annual expenses, which then helps you determine a sufficient investment portfolio.
One million dollars could be more than enough if you want to maintain a simple lifestyle. But the most important part isn’t making the decision to live a simple lifestyle, you have stick to the plan. And after doing some planning, maybe you decide that a full retirement isn’t right for you. Someone working part-time in retirement would have much different savings needs than someone relying entirely on portfolio income. This option is becoming more and more popular for today’s retirees.
Life Expectancies Are Increasing
Longevity is the biggest risk in retirement these days. As a society, we’re living longer due to advances in medicine & better health awareness and this longevity risk changes the million-dollar sufficiency.
This is why we recommend creating two retirement budgets. One budget should highlight your planned expenses in early retirement. This budget will likely consist of travel, moving, gifting to family, or buying luxury assets. Then, you need to create a second budget based on estimates of how long the second half of retirement will last. Alongside your desired retirement lifestyle, you can use sites such as Living to 100 to give an idea of long you are expected to live based on your lifestyle, which helps you determine how much money you need to have saved.
Expectations of how long we live are not the same now as they were 20 years ago when a million-dollar nest egg was deemed enough. Your life expectancy will play a huge role in determining how much money you need to have invested and with this, you also need to plan for other retirement expenses such as long-term care and health care costs.
Don’t Forget About Healthcare
According to Fidelity’s Retiree Health Care Cost report, an average retired couple may expect to spend roughly $300,000 in health care expenses throughout retirement. Health care costs (including long-term care costs) have increased significantly in recent years, which directly impacts the sufficiency of a million dollars for retirement. Your overall health plays the biggest role in your expected personal costs and needs to be taken into account when running retirement projections.
Given the average costs of health care, you can begin to see how a million dollars may not be enough for retirement in today’s world. Medicare costs have risen multiple times in recent years with no signs of stopping. There are many different factors that will play a role in how much you need to have invested to fund health care costs – such as when you decide to take social security, or additional retirement benefits you may receive – but it’s important to note that Medicare doesn’t cover the cost of long-term care.
According to the Administration of Community Living, someone turning 65 in today’s world has almost a 70% chance of needing some form of long-term care in their retirement years. This means you need to plan ahead for the potential costs and purchasing a long-term care insurance policy is one way to reduce the cost burden.
Also read: What You Need to Know About Long-Term Care
A million-dollar retirement nest egg may not be enough for today’s retirees. It’s essential to consider longevity risk, health care costs, and your personal lifestyle before deciding how much you need to have saved. Retirement planning isn’t a one-time activity, it’s an ongoing process that must be revisited frequently. A financial advisor can help you create a retirement plan, determine if a million dollars is enough for your lifestyle and if it’s not, help you make the necessary adjustments to reach your desired retirement number.
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