By Greg Hart, CFP®
In times past, a $1 million nest egg was a gold standard of success. A million in your savings essentially guaranteed the retirement of your dreams. Unfortunately, we are no longer living in those times.
Nowadays, instead of $1 million providing an abundant provision for your golden years, it’s not uncommon to read articles teaching how to survive with a meager million-dollar retirement fund. It’s a bit mind-boggling, isn’t it?
Thanks to inflation, things just aren’t what they used to be. Therefore, the question we need to ask ourselves is: How much do I actually need for retirement?
Unfortunately, with many variables involved, the answer is not so simple. So, let’s take a minute to look at a few of the most significant factors.
What Is My Financial Exit Plan Strategy?
When it comes to your retirement finances, it is far more complex than simply saving for a while and then taking that money when you no longer receive a paycheck. It is crucial to determine the strategies you will use to combat the various retirement risks. At Haddon Wealth Management, we walk our clients through various risks and situations in order to make sure that we have considered how each one might affect their planning, including the ideal time to start using each of your various retirement funds.
Where Do You Plan To Live?
Surely it comes as no surprise that your ideal nest egg largely depends on where you are going to live. As you know, the cost of living varies dramatically from state to state (and even more from country to country).
What is surprising is how much of a difference this can make. For example, according to a study by GoBankingRates, $1 million in Mississippi will last you almost 26 years. Now, that’s not bad. If you retire at age 65, your million could get you into your 90s, assuming you were in good health and lived a pretty uneventful life. On the other hand, in Hawaii, you’ll be lucky if your savings lasts even half that long before it dries up. (1)
What Are Your Goals?
What type of lifestyle do you envision for your golden years? Do you want to travel frequently? Donate to charity? Leave a legacy for your family? Planning for retirement is not always just making sure you can maintain your current quality of life once the paychecks stop rolling in. If your dream retirement lifestyle is considerably different from your pre-retirement lifestyle, you need to take that into consideration as well.
From Which Accounts Will You Draw?
This factor is often overlooked. Take a look at your retirement accounts for a second. What does the balance look like between tax-deferred accounts (e.g., 401(k) and traditional IRA) and tax-advantaged accounts (e.g., Roth 401(k), Roth IRA, and a Private Reserve account)? Do you have a safe tank that could be used to combat “Sequence of Returns” risk? It should be designed to give you an extra 5-10 years of retirement money.
Furthermore, when determining how large your nest egg needs to be, you can’t forget about taxes. Remember, you need to pay taxes when drawing from tax-deferred retirement accounts. That means if you need $61,000/year for living expenses, you’ll actually need to withdraw a bit more than $78,000.2 Contrarily, if you’re invested in tax-advantaged accounts, you don’t need to worry about taxes when withdrawing (as long as withdrawals meet certain qualifying criteria).
How Long Until You Retire?
As we can already see, a $1 million nest egg isn’t what it used to be. Thus, it is safe to assume that as time passes and inflation continues, it’ll be worth even less. The long-term average annual inflation rate is 3.22%. That means prices are expected to double every 20 years. (2) With that in mind, it’s easy to see that you’ll need much more (per year) to retire in 20 years than if you’re retiring next year.
A Few Other Considerations
Obviously, the range of critical questions to ask is about as vast as the range of circumstances that are unique to each of us. However, there are some other questions we can ask ourselves, such as: Do I have a pension? When should I begin to take my Social Security benefit? Do I have long-term care insurance? We would all do well to know the answers to these excellent questions.
The Bottom Line
When it comes to saving for retirement, we can no longer assume a million dollars will get us where we need to go. We must take into account the basics as well as the specifics. Realizing this, how does your retirement savings stack up? Are you on track or do you have some adjusting to do? If you’re not where you should be, don’t panic. There are many ways to get back on the right path, so long as you have one key thing—a solid financial plan.
At Haddon Wealth Management, we can help you put together your own financial road map—a step-by-step plan for reaching your financial goals. To get started, call us at (856) 888-1744 or contact us online to schedule a complimentary get-acquainted meeting.
About Greg
Gregory M. Hart, CFP® is the founder and managing director of Haddon Wealth Management, LLC, a registered investment advisory firm that provides comprehensive wealth management (in-depth financial planning and sophisticated investment management) for clients who value a relationship-driven approach that delivers customized solutions. Based in Haddonfield, New Jersey, Greg works with clients throughout the Delaware Valley, as well as nationwide. To learn more, connect with Greg on LinkedIn, visit our website at www.haddonwealthmgt.com, or call (856) 888-1744 to begin a discussion.
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(1) https://www.gobankingrates.com/retirement/planning/how-long-million-last-retirement-state/
(2) https://inflationdata.com/Inflation/Inflation_Rate/Long_Term_Inflation.asp
