Is a Million-Dollar Nest Egg Sufficient for a Worry-Free Retirement?


Recently, the stock market has performed impressively, boosting many employees’ retirement savings. According to recent data, the number of Fidelity 401(k) plans with a balance of at least $1 million reached more than 200,000 at the end of September, setting a new record high. This rate represents a growth of 7 percent from the prior year. Fidelity also reported that more than 182,400 individual retirement accounts had reached the $1-million mark, another all-time high.

Many people see $1 million as a sort of magic number for retirement savings, but the actual amount you will need to retire depends on your plans. For example, traveling for half of the year will cost significantly more money than staying at home playing with grandkids.

For many retirees, $1 million is simply not enough. Figuring out exactly how much is necessary to retire can be tricky. Unfortunately, many Americans follow the strategy of saving as much as possible and hoping that they do not run out once they stop working.

Calculating the right amount for retirement is difficult because of so many unknown variables, from how you invest to how far you can make your dollar stretch in retirement.

How Long a $1-Million Nest Egg Really Lasts

Even with these unknown variables, it is useful to look at how long a $1-million nest egg would last to figure out whether you need more or not. According to the Centers for Disease Control, average Americans can expect to live for 20 years following retirement at age 65. Taking an average return on retirement accounts of 5.6 percent, which is based on a distribution of 70 percent stocks and 30 percent bonds for the past five years, that $1 million would grow to $2.97 million over the course of 20 years. (However, this figure assumes that you would not subtract any money for living expenses over the course of these 20 years.)

Luckily, Social Security will offer some help with annual living expenses, but the vast majority of people will still withdraw from accounts, especially if they want to maintain their standard of living.

The other issue that you need to take into account is the inflation rate, which is about 1.7 percent per year. With all these factors in place, someone making $115,000 annually who wants to maintain the same income as a retiree would run out of money after 15 years. Of course, many adjustments to this model can be made, from reducing annual withdrawals on the nest egg by cutting expenses to investing more aggressively.

Strategies to Increase How Long a Nest Egg Lasts

Obviously, your nest egg will last much longer when you reduce your spending. For many people, this reduction happens naturally since they are no longer saving for retirement, buying business clothes, or covering the costs of daily work commutes.

However, new expenses, such as health care and vacations, can arise in retirement, so you should keep track of how much you are really spending and think about how long your money will last. Many retirees who maintain their standard of living end up needed only about 80 percent of their pre-retirement income to do so, although this figure can change over time due to new healthcare expenses.

Investing more aggressively is an option, but one that comes with significant risk. Still, it is worthwhile to explore how the rate of return influences how long savings will last.

Imagine a person who saved $1 million and had an annual income of $115,000 at retirement. If they use 80 percent of that income as a retiree, their nest egg would last 25 years with a 7 percent rate of return. However, bumping that rate of return by 1 percent would keep the portfolio producing for 30 years. The nest egg can last even longer if that portfolio includes dividend-generating investments like stocks, exchange-traded funds, and mutual funds since returns will supplement their income and keep them from needing to draw heavily on retirement accounts.

The Bottom Line about Retirement Savings

This exercise shows that $1 million is likely enough for most people to retire, but it is important to remember that the calculations are using current numbers. People who are a decade or more away from retiring need to remember that inflation will make their nest egg worth significantly less. In fact, someone retiring in 10 years would need to have $1.34 million saved to have the same purchasing power as today’s retirees with $1 million.

The situation becomes even more worrisome for individuals 20 years away from retirement, especially given a likely rise in taxes in the coming decades. Social Security payments do scale up with cost-of-living adjustments, but the same is not true of a nest egg. The increases in Social Security will not fill the gap, so these people will need to save even more. While $1 million may be enough for retirement right now, it will not likely be sufficient for people retiring in the coming decades.