When Americans are asked how much money they'll need to retire comfortably, one of the most common answers is $1 million. And this certainly makes sense, as "retiring a millionaire" has long been a popular goal in the U.S., and seeing a seven-figure sum is a key psychological level.
However, is $1 million really enough money to retire? The short answer is "it depends."
$1 million could provide a stable and comfortable retirement for many Americans, but could be inadequate for others. Here's a rundown of what life could look like in retirement if you have $1 million in the bank, and some of the other factors you should keep in mind.
What does a $1 million retirement look like?
Here's one of the most important concepts of retirement saving that everyone should understand: It isn't necessarily about how much money you have saved, but how much sustainable income you can generate from it.
Many retirement planners use a guideline known as the "4% rule of retirement." And while it is admittedly flawed in some ways, it can be a good guideline for planning purposes. Essentially, this rule says that you can withdraw 4% of your savings in your first year of retirement, adjust this amount upward for cost-of-living increases in subsequent years, and have a very low chance of running out of money in retirement.
So, if you have $1 million saved, the short version is that you can expect about $40,000 in annual sustainable income from it.
However, keep in mind that income from your retirement accounts and other savings isn't the only source you'll have. At minimum, you'll most likely collect Social Security. You may also have pensions or other income streams depending on your situation.
Consider this example. Let's say that you have a million-dollar retirement nest egg, and you and your spouse each receive $25,000 per year from Social Security. Combining this with the $40,000 you can sustainably withdraw from your savings produces an annual retirement income of $90,000. For many retirees, this could certainly be enough to live on.
Other things to keep in mind
The amount of money you have in savings and your other retirement income streams don't tell the entire story. There are other things you should consider as well, including (but not limited to):
- Assets: If you have substantial assets, it could definitely reduce your retirement savings needs. For example, if you have a portfolio of investment properties that could potentially be sold, you could be in great shape for retirement without a ton of money in the bank.
- Cost of living: Someone with $1 million in South Carolina (like me) would likely experience a completely different level of financial security than someone with $1 million in the bank in San Francisco.
- Debts: One of my biggest retirement goals is to have a home and cars that are completely paid off before I stop working. In simple terms, your retirement income will go a lot further if you don't have to worry about mortgage and car payments.
The bottom line
Like most financial topics, there's no perfect answer to what retirement will look like with $1 million in the bank. For many people, especially those with other sources of retirement income, this could be more than enough. For others, such as those in high-cost areas or with significant monthly obligations, it could be highly inadequate. But the general framework discussed here can help you decide if you should aim for more.
