A millionaire’s retirement isn’t all it’s supposed to be. A million dollars seems like a lot of money, but when you spread it out over a few decades, it doesn’t get you that far. If your goal is to have a comfortable retirement, you need a better plan than just aiming for that arbitrary savings goal. Here’s why.
Why saving $1 million might not be enough for retirement
If you spread $1 million over 25 years of retirement, that gives you a budget of just $40,000 per year. Coupled with social security and possibly a pension, this could be enough to fund a comfortable lifestyle today. But many people won’t retire for decades.
Inflation will continue to drive up costs, and years later $40,000 won’t buy as much as it does today. In addition, most workers are not eligible for a pension and Social Security trust funds are running out. This could potentially lead to benefit reductions in the future.
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All of this suggests that workers today will need more savings to cover their retirement expenses, especially if they are planning a long retirement. You may need $2 million or even more, but making $2 million your retirement savings goal isn’t much better than having a $1 million savings goal. . If you want to be sure to save enough, you need a personalized retirement plan.
How much should you save for your retirement?
There are several ways to estimate the costs of your retirement. One of the simplest is to save 25 times your annual salary. This is supposed to help your money last at least 30 years, but it may not work that way. If you plan to make a lot of major purchases or travel a lot in retirement, you’ll want to create a cushion in your budget for these expenses.
You can also estimate your retirement expenses by thinking about your estimated annual costs and how many years your retirement will last. Multiply your estimated annual expenses by the number of years you will be in retirement, adding 3% per year for inflation. If that sounds too mathematical, a retirement calculator can do the hard work for you. It will also tell you how much you need to save per month (and overall) to cover these costs. Again, you might want to build a cushion if you’re planning on major purchases.
Remember that you probably won’t have to finance your retirement yourself. Many workers are eligible for Social Security, and if you are married, your spouse may also qualify. You can also get a 401(k) match from your employer.
Try to estimate the amount you will receive from these sources and subtract it from your total savings goal. For example, if you think you need to save $600 per month and you receive $100 per month as an employer 401(k), you only need to save $500 per month on your own.
If your savings goal seems out of reach, there are a few things you can do. First, try to find more money to spend on retirement. You can try cutting expenses, starting a side hustle, or asking for a raise.
If that’s not possible, delaying retirement might work. It’s not ideal, but even a delay of a few months can make a big difference. This gives you more time to save while shortening the length of your retirement.
Delaying Social Security can also help, because each month past your full retirement age, you avoid claiming increases in your benefits until you hit 70. If you plan to live to be 80 or beyond, you’ll likely get more money waiting to sign up. only by starting as soon as possible. But if your health isn’t optimal, starting earlier is probably smarter. You can estimate your social security benefit at different starting ages by creating a my social security account.
Try a few different scenarios until you find a plan that works for you. Next, see if you can set up automatic retirement account contributions so you don’t forget to make them. Also set a time to review your retirement plan each year. Take this opportunity to reassess your investment strategy and rethink your retirement goals. Once you have a proper plan, you’ll feel much more confident that you’re saving enough.
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