If you search for retirement advice online, you’ll often find that $1,000,000 seems to be a recurring target number. But is that a goal you should be saving for, or is it outdated advice?
Q: Where did the $1 million retirement benchmark come from?
A: Historically, $1 million became the goal when it was popularized alongside the 4% Rule in what is known as the Trinity Study, nicknamed based on the university it came from. This study, published in 1998 and titled Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable, suggests that if you withdraw 4% of your portfolio annually, your money should last 30 years. On a $1 million portfolio, that equates to $40,000 a year. Decades ago, $40,000 provided a high standard of living. Today, after accounting for inflation, that same $40,000 doesn’t go nearly as far, yet the $1 million benchmark persists.
Q: Is $1 million enough to retire on today?
A: Maybe. But your retirement needs and how much you’ll need to save are influenced by many factors, like:
- Your desired lifestyle and location
- Retirement age
- Healthcare costs
- Debt obligations
- Investment income
- Taxes
- Longevity
- Inflation
A person retiring at 67 with modest spending and low debt may live comfortably on far less than someone retiring early with high expenses and extensive travel plans.
That’s why focusing on a single number can be misleading.
Q: What role do assets—both liquid and illiquid—play in this equation?
A: Net worth and retirement readiness are not the same thing. You might have $1.5 million in total assets, but if $800,000 of that is tied up in your primary residence (an illiquid asset), you can’t use it to pay for groceries or healthcare without selling the home or taking a loan.
A holistic strategy balances liquid assets (cash, brokerage accounts, IRAs) for immediate needs with illiquid assets (real estate, business interests) that provide long-term stability. You need a plan for converting those assets into cash flow when the time comes.
Q: Does my Social Security timing and tax situation affect the goal?
A: Absolutely. Social Security is a massive liquid component of your strategy, and the timing is important. For instance, the difference between claiming at 62 and at 70 could significantly affect your income plan. Claiming at 62 permanently decreases your Social Security benefit by 30%. But if you wait until age 70, you could receive 124% of your retirement benefit. Having a high reliable source of income, like from Social Security or annuities, means your savings benchmark could potentially be lower.
Furthermore, taxes are often an overlooked expense in retirement. Retirement income can come from taxable, tax-deferred, and tax-free sources. If your $1 million is in a Traditional IRA, you still owe the federal government a good portion of it. If it’s in a Roth IRA, it’s all yours. It’s important to look at net-of-tax income, not just gross account balances.
Your retirement nest egg may also be spread across several kinds of investment tools, so it’s important to consider the order in which you withdraw funds as well. Where you withdraw your income can affect:
- Your tax bracket
- Medicare premiums
- Social Security taxation, and
- Long-term portfolio sustainability
Q: What about risks like inflation and healthcare?
A: This is where a simple number or benchmark falls short. A static $1 million portfolio doesn’t account for longevity risk (living longer than your money lasts), inflation risk (the rising cost of goods), or healthcare risk. People are living longer than ever thanks to modern medicine, but that may mean you need your money to last longer than you originally planned for. Healthcare and long-term care costs can also be substantial. The average cost of a senior care facility can range from $3,000 to $10,000 per month, depending on the level of care provided, and if not planned for, these costs could quickly deplete a retirement portfolio. It’s important to make sure your retirement strategy includes specific contingencies for these variables, whether through insurance, health savings accounts (HSAs), or dedicated emergency savings.
So, how much do I need to save for retirement?
The Real Answer: You’re asking the wrong question.
The question shouldn’t be, “Do I need $1 million?” or “How much do I need to save?” The real question is, “Do I have a holistic strategy to support my lifetime cash flow needs?”
Retirement readiness isn’t about hitting a target number in your bank account. Instead, your retirement plan should be a comprehensive framework that coordinates:
- Social Security Optimization: Choosing the right time to claim to maximize your guaranteed floor.
- Asset Location: Understanding the difference between your liquid savings and illiquid equity.
- Tax Efficiency: Seeking to reduce the taxes on your withdrawals.
- Risk Coverage: Protecting yourself against retirement risks like longevity, inflation, and healthcare.
- Emergency Reserves: Ensuring a market downturn doesn’t force you to sell assets at a loss.
Retirement planning is not just about asset accumulation. It’s about building a plan that helps you live confidently through every stage of retirement. If you find yourself worrying about whether you have enough, it’s time for a second opinion. We can help you coordinate your Social Security timing, optimize your tax strategy, and help you protect your assets from inflation so you can spend your time pursuing your goals in your retirement.
Sources:
https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf
https://www.nerdwallet.com/retirement/learn/social-security-62-vs-67-vs-70
https://health.usnews.com/best-senior-living/articles/types-and-costs-long-term-care-facilities
The source(s) used to prepare this material is/are believed to be true, accurate and reliable, but is/are not guaranteed. This content is provided for informational purposes only and should not be viewed as personalized investment, tax, or legal advice.
All investing involves risk, including the potential loss of principal. The “4% Rule” is a historical benchmark and not a guarantee of future portfolio longevity. Actual withdrawal rates should be based on individual risk tolerance, market conditions, and investment performance; market volatility or a sequence of bad returns can significantly impact the sustainability of any withdrawal strategy.
Any guarantees mentioned are backed solely by the financial strength and claims-paying ability of the issuing insurance company. We are not affiliated with or endorsed by the Social Security Administration or any government agency. Past performance is not indicative of future results.
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