For years, the thought of $1,000,000 saved for our retirement has been considered the benchmark target to ensure dreamy golden years. While a substantial amount of money and certainly nothing to scoff at, it might not be enough for you to enjoy the kind of lifestyle you’re really hoping for.
Preparing For Retirement
First things first: the number you need for retirement is completely up to you and the lifestyle you wish to lead. On top of this, you are likely to be thinking about a legacy, so careful retirement planning must be taken into consideration when assessing a target figure. That said, making a plan of action and a benchmark to works towards is a sensible way to ensure you have enough saved up to live out the rest of your peaceful days!
Before we have a look at what kind of figure we should be aiming for, here are some important considerations to help you assess what’s right for you:
- Current age and when you wish to retire — Try and be realistic about this! Yes, a lot of people want to retire “early”, but forget that you need to sustain yourself for all the years you’ll be living when you finish work. If you retire at 65, how many years are you expecting to live…? Remember, we are living longer than we used to and you may be spending 30 years or more in retirement! How will you fund this?
- Retirement goals — This can cover a lot of areas. Where do you want to retire? What sort of lifestyle do you want to lead? Will you be travelling? Will you do some form of work, or not? You may not know the answers just yet, but having an idea of what you may want and how to facilitate that will help in your planning.
- Sources of retirement income — How are you going to fund your retirement? This could cover many options: savings, investments, pensions, insurance, rent, inheritance etc. What plans have you got in place to cover these areas? Remember, savings and investments pay out greatest when started earlier.
Is $1,000,000 Enough?
To help us understand the figure better, we can look at something called the “Four Percent Rule“, which aims to last at least 30 years into your retirement.
Now, this is neither perfect nor suitable for everyone, but it can visualise how our money could work in retirement:
If you stick to the 4% rule, here’s how much you could withdraw annually from three different nest eggs:
- $500,000—$20,000 a year
- $1 million—$40,000 a year
- $2 million—$80,000 a year
To figure out how much income you’ll need in retirement, take your estimated monthly expenses (be sure it’s realistic) and divide by 4%. So, for example, if you estimate you’ll need $50,000 a year to live comfortably, you’ll need $1.25 million ($50,000 ÷ 0.04) going into retirement [Investopedia]
This method provides an example of what you may need to facilitate a certain lifestyle in retirement, in terms of yearly income; it may offer a benchmark to aim for, although it is not an all-encompassing figure.
As you can see, we could generate $40,000 a year from $1,000,000 saved up, which may most certainly seem a favourable amount — but remember, that is dependant on the person and what they desire from retirement.
Your dream retirement should be reflected in your target funding.
$1,000,000 may be adequate for some, but not for others — and some may not even need that much.
