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While you may have heard that you need at least $1 million in the bank to retire, a comfortable retirement will look different for everyone. Some may need much more than this, while others can retire comfortably on much less, depending on expenses and other income sources.
So what’s the more realistic minimum number you should aim for in retirement?
Why doesn’t the $1 million rule work for everyone?
Retirement costs can vary greatly depending on where you live, how healthy you are, whether you have a mortgage and what type of lifestyle you want. For example, if you’re planning to retire abroad in Thailand, your retirement budget will look completely different than if you’re retiring in New York City.
“People pay attention to round numbers, but the right amount is individual,” said Ben Storey, director of retirement strategy at Bank of America Merrill. “It depends on your income needs, location and how long your retirement can last.”
He adds, “It’s tempting to put a single number on retirement, but the answer to how much you’ll need to save really depends on the life you expect to live.” If you need help figuring out what your number is, here are some classic benchmarks that financial planners use to estimate how much money someone needs:
- 4% rule: This rule says you can safely withdraw 4% of your retirement savings in the first year, then adjust for inflation annually, ideally for 30 years.
- Rule of 25: This rule is basically the same as the 4% rule, but it works backwards. Multiply your expected annual expenses by 25. This is a hefty amount of money you will want to save.
- Pay Multiplier: Some advisors suggest saving 8 to 10 times your last salary by retirement. So if you make $120,000 a year, you should have at least $960,000 to $1.2 million in savings.
These aren’t strict rules, but they can help you get an idea of how much money you’ll need for your ideal retirement lifestyle. For example, using the 4% rule, you’ll need about $600,000 to retire comfortably in Thailand, assuming you can live on $2,000 per month (4% of $600,000 is $24,000 per year). But if you’re planning to retire in a high-cost city like New York, where $6,000 a month is more realistic, you’ll need to save about $1.8 million to maintain the same 4% withdrawal rate.
Why is it safe to save more than the minimum?
Trying to retire with too little can quickly backfire. Some reasons for this:
- You may live longer than expected: According to the CDC, the average life span in the US is 78.4 years. So if you retire at age 65, you’ll have to stretch your savings for the next 13 years or so.
- inflation: Inflation negatively affects the purchasing power of your savings, meaning the value of your savings may decrease with each passing year.
- Health care is not cheap: According to the Employee Benefit Research Institute, retired couples may need to save up to $428,000 to be able to cover their medical expenses, depending on their Medicare coverage level. This amount is likely to increase with time.
- Market downturn could hurt early retirees: If the first few years of retirement coincide with a recession, your portfolio could take a hit.