As retirement becomes more and more expensive, it’s more important than ever to have a healthy nest egg. Between soaring health care costs, longer lifespans, and ever-increasing costs of living, most workers will need to save a substantial amount to retire comfortably.
But how much should you save? A million dollars is a number often used when it comes to setting savings goals, but do you really need a million dollar retirement fund? It depends.
How far will $1 million go in retirement?
The amount you will need to have saved for retirement will largely depend on factors such as your age, your future expenses and the number of years you plan to spend in retirement.
In some cases, you may need more than $1 million to retire comfortably. If you plan to spend, say, $50,000 a year, that would be $1 million after 20 years — and that’s not even accounting for inflation.
Other retirees, however, may need less than a million dollars to make ends meet. If you plan to continue working in retirement, for example, you won’t have to rely so heavily on your savings. Or if you don’t expect to spend decades in retirement, you may be able to live comfortably on a smaller nest egg.
Social Security benefits can also make it easier to retire with less, but keep in mind that your monthly payments were only designed to replace about 40% of your pre-retirement income. This means that you will probably still have to save a substantial amount yourself.
How much should you save?
There is no fixed number as to how much it is good to save for retirement. Even ambitious goals like $1 million won’t work for everyone, so you’re better off calculating your own individual needs rather than relying on generic criteria.
To calculate your retirement savings goal, you must first determine how much you plan to spend each year in retirement. This number may be different from the amount you currently spend, so think about how your lifestyle and spending habits might change after you quit your job.
Also think about how many years you realistically expect to spend in retirement. Try to be as honest as possible with yourself here. Although no one knows exactly how long they will live, the more accurate your estimate, the easier it will be to plan your future finances.
It may be a good idea to also create a reserve in your savings goal. Unforeseen expenses don’t stop once you retire, and it will be harder to replenish your emergency fund when you’re living on a fixed income. Things like healthcare costs later in life can also deplete your savings faster, so it might be wise to assume that you’ll be spending more than you think.
put it all together
Once you have an idea of how much you’ll be spending in retirement, run your numbers through a retirement calculator to get an estimate of how much you should aim to save. A retirement calculator can factor in things like inflation, giving you a better idea of how much you’ll need to make your savings last.
Keep in mind, however, that this is still an estimate. Life can be unpredictable and no one can say for sure how much retirement will cost. But the more you can plan, the better prepared you will be for your retirement years.