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Does $1 million make you retirement ready?

An important consideration is life expectancy

According to a recent survey by Northwestern Mutual, Americans believe they need $1.25 million to retire comfortably. In three years of blogging about retirement, I have approached the question of ‘how much’ several different ways. The answer comprises two factors: your age at retirement and how long you will live. An important consideration here is whether you could live to be older than 90, implying that you will need your savings to last several decades.

Life expectancy is an important consideration in how much you need to retire

Life expectancy is 77 years, but was at 79 in 2019, before the pandemic. According to Macrotrends, the UN projects life expectancy to be more than 80 by 2030. So $1 million invested translates into about $70,000 (in current values) of annual income if you retire at 65 and live to be 80. Add your Social Security benefit to that and that is your standard of living for a 15 year period.

Is it possible then that $1 million would be sufficient – maybe? Wealth advisors will tell you that you should not prepare a financial plan for average life expectancy, but rather plan for income needs into your 90s.

Retirement income you need to retire

As of 2021, the U.S. Census Bureau says the mean retirement income for Americans age 65 and above was $73,288. Should you live for another 30 years beyond retirement, that means you’ll need $2,198,640 — and that’s without inflation. Therefore, if $1 million (or $1.25 million) is the target, then expect annual retirement income to be substantially less for a life expectancy above 90.

The reality, though, is that only around 10% of retirees have $1 million or more in savings, according to the Federal Reserve’s Survey of Consumer Finances. That would suggest that most of us will have to live off savings less than $1 million. In fact, the Fed Survey identified that retirees aged 65 to 74 have average retirement savings of $426,000 and for those aged 75 or older the average is $357,000.

What can I afford to spend annually in retirement

So the likelihood is that retirement savings less than we would like will dictate the retirement that we can afford. And it will not necessarily follow that our living expenses will decline over time. Travel may make up a greater proportion of the budget in the early years, but health care expenses may dominate at the back end. Life expectancy will play a major role in this and betting short in this regard can have disastrous consequences.

One way of getting to that ideal threshold of $1 million (or $1.25 million) is to begin saving early. Charlie Munger, Vice Chairman of Berkshire Hathaway, famously advised at an annual shareholders meeting to get that first $100,000 saved, it’s the hardest, but the most important. The six-figure benchmark is a psychological threshold of sorts that is important to gain savings momentum.

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