Why $1 Million May Not Be Enough to Retire Comfortably | Smart Change: Personal Finance


(Stefon Walters)

There is no universally accepted number for how much someone will need to save for retirement; many factors will determine that, including lifestyle, location, age, and the various income sources someone has. While there may not be a set figure, conventional wisdom tells us $1 million may not be enough for some people to retire comfortably. Here’s why.

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Applying the 80% rule

The 80% rule is good to follow when figuring out the annual income you’ll need in retirement. It states you should aim to have 80% of your preretirement annual income to maintain your current lifestyle in retirement. Here’s what applying the 80% rule would look like at different income levels:

Preretirement Annual Income Approximate Annual Amount Needed in Retirement
$50,000 $40,000
$80,000 $64,000
$100,000 $80,000
$150,000 $120,000
$200,000 $160,000

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Data source: Author calculations.

Let’s imagine you saved up $1 million making $80,000 annually. If you follow the 80% rule — meaning you’d want $64,000 annually in retirement — and your savings didn’t generate any income, it would only last you just over 15 years. It’s even worse if you earned more; a $1 million savings would only last someone making $150,000 just over eight years.

Here’s how long a $1 million savings would last at varying income levels for those following the 80% rule, assuming no investment:

Preretirement Annual Income Approximate Annual Amount Needed in Retirement Number of Years Savings Will Last If Not Invested
$50,000 $40,000 25
$80,000 $64,000 15.6
$100,000 $80,000 12.5
$150,000 $120,000 8.33
$200,000 $160,000 6.25

Data source: Author calculations.

Of course, if you invest your $1 million, it’ll last longer. For those making up to $100,000, the returns on investment would be high enough to cover the annual amount needed. However, those making over $100,000 would still be spending more money than was coming in, and the higher the spending needs, the faster the $1 million would run out.

Applying the 4% rule

While the 80% rule focuses on the annual income needed, the 4% rule focuses on how long your savings may last. The 4% rule states retirees should plan to withdraw 4% of their retirement savings every year for 30 years (adjusting for inflation) without worrying about outliving their savings.

To calculate your ideal retirement savings based on the 4% rule, multiply 25 by your yearly income required in retirement. So, if your preretirement income is $80,000 — meaning you’ll likely need around $64,000 annually in retirement — you would ideally have $1.6 million saved up for retirement.

This table shows approximate retirement savings goals based on the 80% principle and 4% rule.

Preretirement Annual Income Approximate Annual Amount Needed in Retirement Approximate Retirement Savings Goal
$50,000 $40,000 $1 million
$80,000 $64,000 $1.6 million
$100,000 $80,000 $2 million
$150,000 $120,000 $3 million
$200,000 $160,000 $4 million

Data source: Author calculations.

Applying both the 80% and 4% rules of thumb shows that anyone currently making over $50,000 who wants to maintain their current lifestyle in retirement will likely need more than $1 million in savings. Of course, this shouldn’t be universally applied to everyone because different people will ultimately be satisfied with different lifestyles in retirement.

However, if you’re putting together financial plans, these rules of thumb are good starting points to help guide your retirement savings. One of the best things you can do is make consistent investments utilizing dollar-cost averaging and take advantage of tax-advantaged retirement plans such as 401(k) plans and IRAs.

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