Do You Really Need $1 Million to Retire?

How much do you think you need for retirement? If your answer is $1 million, you’re not alone. The number crops up often as a baseline goal in financial media, and in public perception. When global investment firm Schroders surveyed older U.S. workers in early 2023 about how much money they thought they would need to fund the retirement they want, the average answer was $1.1 million. However, chasing a million might not be the best use of your retirement preparation time, financial advisers say. In some cases, it may do more harm than good. “I think it’s easy to explain concepts by using that number, and it’s more realistic than using a $100,000 or $10 million,” says Colin Exelby, a certified financial planner and founder of Celestial Wealth Management in Towson, Maryland. “But other than that, I don’t think it’s really helpful and can probably cause anxiety and stress if you’re not hitting that number.” Indeed, Schroders’ 2023 U.S. Retirement Survey found that more than half of workers 45 and older are worried that financial stress will negatively affect their overall health. As much as they might anticipate needing a million, most expect to fall well short. Three in five respondents predicted they would have less than $500,000 saved when they retire, and one-third said they would not reach $250,000. Those expectations mirror older Americans’ actual savings, according to Federal Reserve data. The most recent version of the agency’s Survey of Consumer Finances found that adults ages 45 to 54 had about $255,000 on average in retirement savings in 2019, and those in the 55-64 group had about $408,000.

‘No magic number’

Fears of outliving your money are understandable and provide plenty of incentive to set ambitious savings goals. But “there’s no magic number,” says Ron Dedesko, a chartered financial analyst and investment adviser with Bespoke TFC Capital in Austin, Texas. “A lot of people put an emphasis on round numbers,” Dedesko says. More important is to consider how, and where, you want to live in retirement and come up with a plan, and an amount, that works for you. A million might be “more than ample” for some people, he adds, and not enough for others. There are a lot of variables. What’s the cost of living in the community where you hope to retire? How do you envision spending those years? Do you plan to travel? Pick up an expensive hobby? Work part-time? Hang around the house? Health care is another consideration in estimating how much you’ll need to retire securely — it’s likely to be one of your biggest expenses. A couple who both turned 65 in 2022 will need, on average, $315,000 in savings after taxes to cover health care costs in retirement, according to Fidelity. Though national averages can help with planning, you may want to save even more if you have chronic health conditions, Exelby says. Consider your parents’ health and age as well. No one has a crystal ball, but if you come from a line of people who lived into their late 90s, you may want to plan for longevity too. Factor in the possibility that you or your partner may need long-term care. The median annual cost for 40 hours a week of home health services was about $62,000 in 2021, according to insurance provider Genworth. A semiprivate room at a nursing home cost nearly $95,000 a year. Long-term care insurance can help cover those costs, although the high premiums could prove to be too steep for many. A 65-year-old couple could expect to pay $3,750 to $9,575 per year for a policy that covers both spouses, according to the American Association for Long-Term Care Insurance. Keep in mind that Medicare doesn’t cover nursing homes or assisted living.

Location, location, location

Whether or not they reach seven figures, your savings will go further in certain parts of the country. A recent study by LendingTree, an online marketplace for mortgages and other loans, estimated how much someone would need to save to retire comfortably in all 384 U.S. metropolitan areas, based on what the average retiree spends per year in each. Though the national average was $1.07 million, there were wide disparities, from almost $780,000 in Johnstown, Pennsylvania, to $1.37 million in San Francisco. In most metros, $800,000 to $1 million was a sufficient nest egg, LendingTree projected, for retirees who spent at average levels and annually withdrew 4 percent of their savings. When the researchers did another set of estimates, based on how much retirees would need to draw from savings to match the median income for nearly retired (ages 55-64) workers in each area, they came up with more modest nest egg needs: $570,357 on average, and less than $500,000 in 235 of the 384 locales. Why such a big disparity? Numerous factors affect spending in different places, some of which we can’t control (utility costs, local taxes) but some we can. You don’t have to keep up with the biggest — or even the average — spenders in your area to comfortably get by in retirement, says Jacob Channel, senior economist for LendingTree. “If you read the study and think, ‘Oh God, I need $1.4 million to retire and I’m not going to have anywhere near that,’ there’s a lot of wiggle room,” he says. “Not only does where you live matter, but what you plan on doing is also really important as well.” Though moving to a more affordable area can help make your money go further, relocation can carry different kinds of costs, Dedesko points out. A distant move could mean leaving a beloved community or losing touch with your social network. “There are ways to control costs even in higher-expense states,” he says. “Maybe people play chess in the park. Maybe people play tennis at public courts outdoors.”

Money in, money out

Expenses aren’t the only thing to consider when you’re saving for retirement. For example, you won’t need as large a nest egg if you have other money coming in, such as Social Security, pensions or proceeds from a house sale. “Retirement as a pure number, I think there is a fallacy at looking at it in that fashion,” says Danny Lee, a wealth adviser with Northwestern Mutual in Reston, Virginia. “Ultimately, there is a calculation. When you say $1 million, I don’t think it’s accurate for a lot of people. Instead, look at such factors as, am I going into retirement as an individual? As a married couple? Are there inheritances I can depend on? Is anyone relying on me?” Once you look at your future needs — what you anticipate spending and what you expect to have coming in — you may feel like you’re behind on your goals. Don’t panic, Lee says. “Retirement is not a pass-fail proposition. It’s to what degree” you reach your target, he says. “If you made 90 percent of the goal, I consider that a win.” The key is to put a plan in place today. Here are strategies that can help.

• Automate savings and investments. Work with your financial adviser, workplace benefits manager or 401(k) administrator to make contributions to retirement accounts automatic. You’re more likely to stick to the savings plan when you don’t have to think about it, Lee says.
• Keep income flowing longer. Continuing to work past your full retirement age could help ensure your money can last a longer life span, Dedesko says. You might even start a side business that feeds your interests as well your bank account.
• Put plans in place for health care. To prepare for future medical costs, Lee suggests taking advantage of a health savings account (HSA) if your employer offers one. These tax-advantaged accounts let you save and pay for qualified medical expenses tax-free.
• Factor in moving costs as well as savings. Moving to a place with a lower cost of living can still mean replacing a paid-off house with monthly rent or a new mortgage. Don’t overlook less obvious expenses, such as local taxes or flood insurance if you’re considering a storm-prone area.