Can I Retire on $1 Million?
Photo by Aaron Burden on Unsplash
Today we will talk about an exciting topic that is on everyone’s mind whether you are starting to invest or you are a mature investor. It will be about how much $1 million will last you in retirement and when it is enough for you to retire.
A million dollars is a common benchmark when it comes to retirement goals because it sounds like you got a lot of money and many resources will recommend this number as how much you should save before you retire. However, despite the fact that a million dollars sounds like a great goal to strive for, the truth is a million is not what it used to be and it probably is not even enough for you to live comfortably and have a great enjoyable retirement. Many books and strategies in the last decade were written with that $1 million goal in mind, so even though they provide valuable information you should not stop once you reach that number.
Let’s unwrap it to better understand why that is the case and why you would want to increase your target number. So how long will a million dollars actually last in retirement? We need to figure out what are the factors affecting how much your retirement costs. The first factor that heavily affects the final number is the cost of living that varies dramatically depending on where you are located. Obviously a person living in a small town in the Midwest will be able to make a million dollars to last a lot longer than a person living in California or Hawaii. So when determining whether a million dollars will be enough to retire on it is crucial to take into account what the cost of living where you are going to be located when you retire is.
Another important thing to pay attention to when considering the target for retirement is what lifestyle you will maintain. It means that some people are able to get by perfectly fine on less than $40,000 a year while others have become used to a lifestyle that might cost a little more than that. So it is one thing to calculate how much you need to save just to survive post retirement and it is another thing entirely to calculate how much you need to save to pay for the lifestyle you have become accustomed to. This is why you can see that even though one million dollars is a great target to aim for and it is a lot of money, having a single benchmark that can be applied to everybody is a bit ineffective.
Moving on to the next thing that will affect the final amount is inflation. Unfortunately, inflation is the ever-present force that we have to take into account because it slowly eats out the value of the money you saved over time. The good news is that investing your money in the stock market rather than keeping it in cash will allow you in most cases to bypass inflation since the stock market typically outperforms inflation. However, this does not change the fact that inflation skews the true value of the benchmarks and a million dollars’ buying power will vary from year to year. This is why it is important to know when you are planning on retiring and factor in the average inflation rate when you are setting your retirement goals.
The truth is that every person's retirement needs are going to be different and how much you need to retire is going to be influenced by your location, your lifestyle, the inflation rate, and a wealth of other factors.
By now it is clear that a million dollars will probably not be enough to comfortably retire. The important takeaway is that you need to sit down and calculate your own goal based on your own situation rather than relying on standard benchmarks such as a million dollars. Once you calculate that figure by determining how much money you want to have available each year, multiply that number by the optimistic estimate of the years you expect to be in retirement. The number you come up with might be a little bit large and you might be shocked by how much you will need in retirement. But worry not, the good thing about it is that it can be achieved through investing in the stock market. There are many ways available to you in doing so, from index funds to individual companies. As long as you do the research before you invest your own money you will be in a great situation and your money will easily grow before you retire.
Before we end this article I want to share one more thing, if you are planning on retiring 20 years from now and you want to live a lifestyle of about fifty to sixty thousand dollars a year you will need about two million dollars unless you invest your money in the stock market and able to beat inflation and keep on growing your money over time even in retirement then you might not even need a two million dollars nest egg.
