$1M dollars seems like a lot, but it unfortunately isn’t much when you really think about it from a retirement planning perspective.
So how much do you really need for retirement?
This simple question needs a compounded response because a lot goes into answering it. Before I used to throw out random numbers in the millions, but a couple of years ago when I got married I realized this isn’t the best method for long term planning. There are a lot of factors to consider and retirement planning has many layers to it.
What makes it difficult is that I’m 26 and retirement is about 39 years away. Projecting that far out into the future is a challenging task for anyone. However, all I know is that I refuse to enter retirement with uncertainty and become reliant on others to keep me afloat. I hear about it all the time, folks who can’t stop working and can’t rely on the Social Security checks because it’s not enough to get by.
For me, I don’t have to look very far for a real life example of uncertainty. My mom is about to turn 62 and she has very minimal savings for her retirement. Truth be told, her savings wouldn’t even last her 1 year of retirement. That terrifies me and I know it scares her too.
What’s in her favor is the support she will receive from her family when she does decide to retire and she will receive a small income from 1-2 sources, not including Social Security, but it’s not the ideal scenario for anyone who is about to retire.
What I know is that I do NOT want to be in that position when I’m nearing retirement. Here is how I set our retirement goals 39 years from now. I keep repeating 39 years because Vania and I decided we would like to retire by 65, but we are both workaholics so lets see how that goes. lol.
$1M is not even 25% of what I will need for my personal retirement goal
Here’s why $1M won’t cut it for us…If a $1M retirement nest egg was our goal, this means we would only be able to withdraw $36,000 yearly in retirement even with a 4% annual investment return during retirement. Keep in mind that taxes may be applicable and inflation in 39 years will reduce your purchasing power. So, for Vania and I personally $36,000 won’t cut it for our plans. For some, this may be great for their retirement and that’s completely OK. It all comes down to personal desires and how you would like your retirement days to be.
For us, our retirement goal is to have $4.7M by the time we are 65. This will allow Vania and I to live with our yearly desired retirement income of $150,000 and pass on a projected $1.5M to our kids when we pass away. It all sounds great, but this requires us to save $23,000 a year for the next 39 years AND hope for 7% investment returns pre-retirement and 4% returns in retirement.
I came up with these goals and projections using one of my favorite calculators, Bank Rate’s retirement calculator. It’s extremely simple and you just have to answer 8 financial questions and the calculator will give you your retirement projections.
Whenever I’m planning for the long term, I look for the factors that I can and cannot control. In this case, I can’t control: my age, years ’till I turn 65, inflation and market performances. However, I can control our ability to save $23,000 a year. That’s why our savings rate is at the forefront of our personal finances every month and year. If you’ve read our other blog posts, you’ll see that we do everything possible to save for our retirement and investment portfolios, like downsizing our home and living 27% below our means.
If you know me well, now you know why I am so meticulous about our monthly expenses, keeping track of the budget and saving as much as we possibly can!!
The bottom line is to not think of a random number for retirement like $1M, don’t wait too long before you get started with retirement planning and don’t get overwhelmed in the process. Use the Bank Rate calculator and other calculators on the internet to help you create a game plan and focus on what you can control; your savings rate. Regardless of your income, find ways to save, save and save. Even if it’s $5 weekly. Do whatever it takes to get you there.
Keep your retirement plan simple:
- What is your desired yearly income during retirement?
- How much do you need to save on a yearly basis to help you achieve this goal?
- Make sure to take advantage of the markets, have a retirement account, and create a diversification strategy to help you handle the ups and downs of the markets.