Why future retirees need more than $1 million to retire

Why future retirees need more than $1 million to retire

A million dollars is a nice round number for retirement, and it’s long been the target size that financial experts recommend if you wanted to live comfortably in your later years. The argument is that if you retire at 65 with a $1 million nest egg, it should last you for the rest of your life. To find out if you have enough money, you need more than just plugging numbers into a calculator. There are several other factors to consider that can affect how far your savings will stretch. (For more information, see Retirement Planning Basics .)

People are living longer

Thanks to improvements in healthcare and a general increase in the overall standard of living for Americans, men and women are seeing their life expectancy increase year by year. Fifty years ago, the typical adult male could expect to live to the ripe old age of 66.7 years old. Women, who statistically live longer on average, had an average life expectancy of 73.8 years.

Today, these numbers have increased dramatically. According to the Social Security Administration, a man who is 65 today has an average life expectancy of 84.3 years, while women who reach that age are 86.6 years old. The SSA estimates that one in four 65-year-olds will live past age 90, and one in 10 will reach the 95-year-old mark.

Over five decades, average life expectancy has increased by 17.6 years for men and 8.8 years for women. If this continues, today’s generation of Millennial 20-somethings and 30-somethings could see their average life expectancy extend well into their 90s. In this context, 1 million could be. USD in bank not enough to provide comfortable retirement.

For example, let’s say you retire at age 66 and save $1 million. You choose a conservative asset allocation that yields a 5% annual return. You expect to live another 20 years, so use the 4% rule to calculate your payouts. Even with a 3% inflation rate, you would still have nearly 730.000 USD you would have added to your retirement account at age 86. However, if you were to live another 10 years, your retirement balance would drop to just over $16. , 000. (For more information, see Why the 4% rule no longer works for retirees .)

“The increase in life expectancy without a similar increase in our working years means we need to stretch our retirement savings sources further than before,” says Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, California, and author of Index Funds: The 12-Step Recovery Program for Active Investors . “Spending 1 million US dollars in 20 years provides a lifestyle of ca. 50.000 US dollars per year and only 333.333 US dollars in 30 years, which is quite different.”

The cost of living continues to grow

Using the 4% rule above, you can make 40 in the first year.000 $ income from your retirement account. That doesn’t include extra money you get from social security benefits. As of June 2017, the average monthly benefit of social security was 1.254 US dollars. 78. If you received these benefits for the entire year, your total income for the first 12 months of retirement – including income from your retirement account and Social Security – would come to $55, 057. 36. That sounds like a reasonable, even comfortable, amount of money to have for retirement, but it may not be enough to counter the rising cost of living.

According to the Bureau of Labor Statistics, the average household expenditure for seniors aged 65 to 74 is 48.885 USD per year. After 85, the average household spending amount drops to 36.673, but health care costs make up a larger portion of expenses. Currently, a 65-year-old retired couple can expect to spend $266, 589 on health care for the rest of their lives. That assumes they are both in good health and have Medicare Parts B and D, along with supplemental health insurance.

On a monthly basis, they would pay from the age of 65. Paying $583 for health care for the first year of life. From 85, the monthly total would more than double to $211. As housing, transportation, and food become more expensive, inflation increases, and the couple lives longer, there’s a good chance that $1 million won’t be enough to help out. You maintain your standard of living. Research by LIMRA (formerly known as the Life Insurance Marketing and Research Association) shows that inflation at, say, 3% alone would be as much as 117.000 $ in retiree purchasing power could gobble up over time.

Worker savings not keeping pace

Poll after poll suggests Americans are falling short in their retirement savings. According to the National Institute on Retirement Security, the median retirement balance for all working-age households is only $3,000. It rises to just under $12,000 for nearly retired households, which is a pretty scary number. The Employee Benefit Research Institute’s most recent Retirement Confidence Survey found that 64% of workers admit they are behind schedule in saving. Conversely, 22% of workers are very confident about their retirement savings, while 36% are confident they will be able to save enough.

When you look at the numbers, the question shifts from “will 1 million be enough? “Until ” Is it even possible to save $1 million for retirement? “If you’re putting off savings too late, either because you’re paying off student loans or just putting the minimum into your 401 (k), you need to be realistic about how much money you can accumulate. .. The longer you put it off, the more of your income you have to set aside to catch up, which puts even more pressure on your budget.In the meantime, you have missed out on the compound interest you could have earned if you had started earlier.

“When dealing with younger people in their 20s and 30s, I always show them a simple concept: the time value of money,” says Peter J. Creedon, CFP®, CEO and founder of Crystal Brook Advisors, New York, NY “Take a person who has $5.000 per year put away, average 8% return and withdraw at 68. If they start contributing at age 25, with 43 years to contribute, they should have a little less than $1. 65 million. A 35-year-old who has 33 years to contribute should have nearly 730.000 dollars have. A 40-year-old who has 28 years to live will live to about 477.000 dollars. Moral of the story: start early and contribute, because time is your best friend and allows compounding to work for you. ” (For more information, see Delay in retirement savings More in the long run .)

” It’s difficult for 20-year-olds to think about retirement, ” says Marguerita M. Cheng, CFP®, CEO of Blue Ocean Global Wealth in Rockville, MD I position it as wealth accumulation. For example, a 34-year-old client (his parents are my clients) started a Roth IRA 12 years ago. Fast forward to 2016, he used $22k of his $34k as a down payment to buy his first home. At age 22, he wasn’t thinking about retirement, but the Roth IRA helped him build wealth for his financial goals and retirement. For younger clients, it’s important to focus on wealth accumulation, not just retirement.

The Bottom Line

Saving $1 million for retirement is a lofty goal, and while it looks like a fortune, it only goes so far when things like inflation, cost of living and longer life expectancy come along. Into the game. Increasing that number to $2 million or more could be something millennials need to seriously consider if they don’t want to run the risk of running into retirement.

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