You probably envision millionaires living in mansions and traveling the world on well-staffed yachts, but a lot of millionaires look just like you and me. They go to a regular job, they have a monthly budget, and they save up for big-ticket purchases.
The truth is, $1 million really doesn't go as far as you might think these days. And if you're counting on $1 million to get you through your retirement, you could be in for a nasty surprise.
How much do you plan to spend in retirement?
The lifestyle you plan to lead has a huge effect on how long your savings will last. Someone who lives a quiet life in a home they've already paid off is going to have a very different retirement budget than someone who's traveling the globe. So figuring out your estimated annual retirement expenses is the right place to begin when trying to figure out whether $1 million is enough for your retirement.
The average household headed by an adult 65 or older spends about $47,579 per year, according to the latest data from the U.S. Bureau of Labor Statistics. But that data is from 2020, and as we all know, inflation is driving prices up quickly right now. So seniors will likely have to spend more in the future.
If we assume you have around $50,000 of expenses every year, you could spend $1 million in about 20 years. But there's a difference between what you're spending and what you're paying.
What other income sources can you count on?
Most seniors can count on some money from Social Security — and that's true whether you're already retired or you won't retire for decades. But you may not get quite as much as you think. The average Social Security check is $1,661 per month, which gives you about $19,932 per year. That would leave you with a little over $30,000 to pay for on your own each year if you spend about $50,000 in total.
You may be able to get that number down a little further if you have other household members that qualify for Social Security benefits or other aid. But you could also lose some of your Social Security benefits to taxes, depending on your income. So you should plan to fund the bulk of your retirement on your own.
If you only had to pay $30,000 out of pocket for your retirement expenses every year, $1 million could last you over 30 years. But it doesn't take much to upset this balance.
Are you prepared for emergencies?
Unless you have all your retirement savings in Roth accounts, you'll still have to pay taxes in retirement, and that can take a significant chunk of your savings. Then, you'll probably have the odd hospital bill and maybe some other unexpected costs. Couple that with rising living expenses, and you could easily exceed your $30,000 annual spending limit. Even if you don't, you won't exactly be living in the lap of luxury.
If you're concerned you won't have enough, it's a good idea to save more than $1 million. You might have to delay retirement or work part-time for a while to do so, but that's better than running out of money prematurely. And if you do end up with extra funds you don't need, you can always pass it onto your heirs.
No one can tell you whether $1 million is enough money for your retirement. But you don't want to wait until you're already retired to find out. Now's the time to crunch the numbers and figure out what you think you need in order to live comfortably in retirement. Then, begin to craft a retirement timeline that takes this into account.
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