Determining the ideal amount needed for retirement is a common concern for many individuals, and the figure of $1 million frequently emerges as a target in financial discussions and public perception. In a recent survey conducted by global investment firm Schroders, older workers in the United States it is estimated that they would require an average of $1.1 million to fund their desired retirement lifestyle.
However, financial advisors argue that fixating on the $1 million mark may not be the most effective approach to retirement planning and could potentially cause more harm than good.
While using a round number like $1 million simplifies explanations and offers a more realistic perspective than figures like $100,000 or $10 million, it may not be genuinely helpful. According to Colin Exelby, a certified financial planner and founder of Celestial Wealth Management, it can lead to anxiety and stress if individuals fall short of that goal.
Indeed, Schroders’ U.S. Retirement Survey revealed that over half of workers aged 45 and above are concerned that financial stress will negatively impact their overall health. Despite many anticipating the need for $1 million, most expect to fall well below that threshold. Sixty percent of respondents predicted having less than $500,000 saved for retirement, while a third acknowledged they would not reach $250,000.
These expectations align with the actual savings of older Americans, as indicated by data from the Federal Reserve. The Survey of Consumer Finances reported that, on average, individuals between the ages of 45 and 54 had around $255,000 in retirement savings in 2019, while those aged 55 to 64 had approximately $408,000.
The absence of a definitive “magic number” is a key point emphasized by Ron Dedesko, a chartered financial analyst and investment advisor. Dedesko highlights that people often fixate on round figures. Still, it is more important to consider how and where individuals envision their retirement lifestyle and create a customized plan. While $1 million may be more than enough for some individuals, it could fall short for others.
Several variables must be taken into account when estimating retirement needs, including the cost of living in the desired retirement community, planned activities during retirement, plans for travel or expensive hobbies, part-time work, and healthcare expenses.
Healthcare costs, in particular, can be a substantial financial burden during retirement. According to Fidelity, a couple turning 65 in 2022 would require an average of $315,000 in savings (after taxes) to cover healthcare expenses throughout retirement. Chronic health conditions may require even greater savings.
Another consideration is family history and health. The future is impossible to predict, but individuals with long-lived family members might want to plan for it.
The geographical location can significantly impact how far retirement savings can stretch. A recent study by LendingTree, analyzing retirement expenses across 384 U.S. metropolitan areas, demonstrated a wide range of required savings. While the national average was $1.07 million, specific regions varied from nearly $780,000 in Johnstown, Pennsylvania, to $1.37 million in San Francisco. Most areas projected that a nest egg between $800,000 and $1 million would be sufficient for retirees who spent at average levels and withdrew 4 percent of their savings annually.
Furthermore, the study conducted a second set of estimates based on the amount retirees would need to match the median income of nearly retired (ages 55-64) workers in each area. These estimates yielded more modest nest egg requirements, averaging $570,357 and less than $500,000 in 235 out of 384 locales.
Numerous factors, such as utility costs and local taxes, influence spending in different locations, some of which individuals have control over. According to Jacob Channel, a senior economist at LendingTree, It is unnecessary to keep up with the highest or average spenders in one’s area to lead a comfortable retirement.
While relocating to a more affordable area can stretch retirement savings, it is important to consider the potential costs associated with such a move. Leaving behind a beloved community or losing touch with a social network can have drawbacks. Danny Lee, a wealth advisor with Northwestern Mutual, suggests controlling costs even in higher-expense states, such as engaging in free activities like playing chess in the park or using public tennis courts.
When saving for retirement, expenses are not the sole consideration. The value of a large nest egg can be diminished by other sources. Danny Lee emphasizes that retirement should not be seen as a pass-fail situation but as a spectrum. Achieving 90 percent of one’s retirement savings goal can still be a success.
To effectively plan for retirement, it is crucial to take action today. Here are some strategies that can help:
#1 Automate savings and investments:
Work with a financial advisor, workplace benefits manager, or 401(k) administrator to set up automatic contributions to retirement accounts. Individuals are more likely to adhere to their savings plan by making savings a habit.
#2 Extend income streams:
Continuing to work past the full retirement age can provide a longer-lasting income stream, increasing the longevity of retirement funds. Starting a side business aligned with personal interests can also generate additional income.
#3 Prepare for healthcare costs:
If available through an employer, taking advantage of a health savings account (HSA) can help prepare for future medical expenses. HSAs offer tax advantages, allowing individuals to save and pay for qualified medical costs tax-free.
#4 Consider moving costs and savings:
Moving to a cheaper area may save you money, but it is essential to factor in potential expenses associated with the move. For example, replacing a paid-off house with monthly rent or a new mortgage should be considered. Additionally, individuals should consider less obvious expenses like local taxes or flood insurance in storm-prone areas.
In conclusion, focusing solely on the $1 million retirement goal may not be the most effective approach. Instead, individuals should consider their desired retirement lifestyle, healthcare needs, geographical location, and potential income sources to develop a personalized retirement plan. By understanding the factors that affect retirement expenses and savings, individuals can work towards a comfortable and secure retirement.