The Retirement Metric More Important Than Your 401(k) Balance

Americans believe they need $1.46 million in savings to retire comfortably, according to a recent survey by Northwest Mutual. That number was up 15% over the previous year, but in line with the figure from 2024. It is a lot of money, but don’t feel bad if your 401(k) balance doesn’t come close to that. Here’s the more important number to watch.

Humans like goals

It is normal for people to aim for something as they look to a long-term goal. One million dollars, or $1.46 million, is a target of sorts. And it isn’t a bad one, but it may miss the mark when it comes to retirement. Sure, having a giant 401(k) balance is a good thing. In fact, the bigger the better. However, your 401(k) balance doesn’t account for something that may be even more important to your future: your retirement spending.

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To make a ridiculous comparison, if you save $1.46 million for retirement and then spend $1.46 million in the first year of retirement, well, $1.46 million wasn’t enough. Most people won’t spend $1.46 million in a single year. But there is a rule of thumb for spending to guide you: 75% of your pre-retirement income.

The basic idea is that your spending will decline in retirement and you won’t be paying as much in taxes. So, you don’t need as much money to live. This is your income replacement ratio, which helps you set an income target. Once you have a number, which you could push higher or lower depending on your specific needs (there are calculators online to help you with this), the next question is how to get to that number.

Replacing your income isn’t just a savings game

Once you retire, you will likely be collecting Social Security. You should visit the Social Security website to get an estimate of your future Social Security check. That’s going to be the income foundation for most people, but it probably won’t cover all of your spending needs. The rest you need to come up with yourself. If you have a pension, take that into consideration. But, for most, the income from your nest egg will make up the difference.

Another rule of thumb is that you can withdraw 4% of your savings each year and safely expect not to outlive them. You could also focus on buying dividend-paying stocks, aiming for an average yield of 4% in your portfolio. In that way, you wouldn’t need to touch your principal. However, the key is to look at your total retirement savings, not just your 401(k) balance, and see what 4% comes to.

A little more math seals the deal

Add the money you can generate from your savings to your estimated Social Security check with the goal of replacing around 75% of your pre-retirement income. If you don’t reach that figure based on your current savings, you’ll need to raise your savings target until you do.

There’s no right answer to the saving target, as each person will have a different figure. So $1.46 million would be a great goal for some, but way too much for many and too little for others. In the end, your 401(k) balance doesn’t tell you how much you’ll spend in retirement, which is what really determines how long your money lasts. So your income replacement ratio is what you need to add to the mix to really understand how well you are prepared for retirement.

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