Do You Really Need To Save a Million Dollars For Retirement?

Investment advisors and financial news editors frequently use $1 million as a benchmark for the minimum amount of investable funds US households should have socked away on the day that they retire. Well, yes, it would be best if you accumulate more than $1 million of financial assets at retirement. But seriously, how many Americans have any chance of achieving this? A study by Cap Gemini estimates that less than 4% of American households have managed to accumulate $1 million of financial assets, and the vast majority are not even close. So maybe a million dollars seems out of reach for you?

Rather than getting discouraged and simply giving up on savings goals, it is helpful to play with some different scenarios and see how less ambitious savings goals can help you in retirement. Or to see if your retirement expectations are too rosy. Free online tools make it simple and easy to experiment with different plans. For example using the free Portfolio Research Retirement Planner you can see how long your savings are predicted to last based on different savings levels, drawdown levels, retirement dates, and risk-adjusted investment return projections.

For example, let’s say your retirement goal is to retire with $500,000 in investable savings at the age of 65. Let’s assume 2% inflation and that your savings are invested in a diversified, moderate risk portfolio

Based on the retirement drawdown simulation you could spend $30,000 each year from this nest egg, and based on medium return expectations your funds have a 50% probability of lasting into your nineties. Of course, if financial markets perform well your savings will last longer — in fact, the calculator shows that in the best 10% scenario, your $500,000 nest egg will grow to over $1 million by the age of 90, even after withdrawing $30,000 per year. On the other hand, the worst 10% case would mean your funds run out around the age of 80. Investing in a higher-risk portfolio will amplify this effect.

The retirement calculator also shows what you need to do to achieve this goal of a $30,000 per year annual drawdown in retirement. For example if you are currently 30 years old, a $7,500 annual contribution into a more aggressive portfolio offers a median likelihood of accumulating funds to sustain a long retirement.

Experimenting with the retirement calculator will also allow you to compare your probabilities of different returns from investing in financial markets versus the more stable cash flows you could obtain from an annuity. You can compare lifetime payouts from annuities which are summarized in this helpful article from Barron’s.

An annuity guarantees that you have a steady income that you will not outlive, but the downside is the possibility of passing away at a relatively young age and not being able to leave money to heirs. Also, annuities’ higher expenses mean that your return is likely to be less than you might earn in an efficient, diversified portfolio (as you can determine from the retirement calculator). A combination of an annuity and social security to cover your most basic necessities, and earnings from a diversified portfolio for additional income may prove to be your best strategy.

The above analysis is designed to give you a very rough sense of retirement financial projections. The important thing is to see for yourself how you might fare in retirement based on various assumptions and then come up with a plan that works best for you — even if you have not saved a million dollars.

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