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Setting a retirement savings goal could help you stay motivated as you work to build up a nest egg through the years. And for many people, $1 million in savings seems to be the magic number.
But when you dig deeper, you may realize that $1 million in retirement savings isn't the massive amount of money you think it is. The sooner you recognize that, the sooner you can take steps to raise your savings goal.
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The tricky thing about building retirement savings is that you don't know how long your money will need to last. But it's best to plan for a longer retirement and withdraw carefully accordingly.
If you stick with the popular 4% rule, a $1 million nest egg gives you about $40,000 in annual retirement income. The rule allows you to adjust your initial withdrawal for inflation, but not for added expenses.
With that in mind, if you're aiming for $1 million in retirement savings and plan to use a 4% baseline withdrawal rate, you'll need to decide if $40,000 a year is adequate. To do that, you'll have to calculate your estimated spending and factor in other income streams you might have, like Social Security.
Given how expensive life is these days, though, you may find that a $40,000 retirement plan withdrawal plus Social Security is only enough to cover your basic needs. It may not be enough to do things like travel or pursue different hobbies that cost money.
You'll need to run your own numbers and decide how much compromise you're willing to make. If you feel that a $40,000 annual withdrawal from savings won't cut it, then you'll have to adjust your retirement savings goal upward accordingly.
And you may not need to boost your savings goal all that much. Saving an extra $100,000 in the course of your career could give you an extra $4,000 a year in retirement under the 4% rule, which may be enough to do things like take a nice trip each year or pay for a country club membership. But it's important to do the math well ahead of retirement so you're not left scrambling to make adjustments.
Saving $1 million for retirement is no easy feat. And it's certainly a respectable amount of money.
The point, however, is that $1 million in savings may not actually fund the lifestyle you want when you consider how much income that gives you on an annual basis. You're better off finding that out in your 40s or 50s, when there's time to tweak your plan, as opposed to a year or two before you're set to bring your career to a close.
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.
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Think $1 Million in Retirement Savings Will Cut It? Here's the Math That Might Make You Change Your Tune was originally published by The Motley Fool
