Is $1 Million Enough for Retirement?

The short answer: probably not. How much you’ll need depends on a lot of factors, and getting to that number starts with one of the most critical financial documents: Your financial plan.

A million dollars is not what it used to be. The days of large pension benefits are quickly disappearing and Americans are shouldering a much larger portion of their retirement than they have in the past.

So if $1 million isn’t enough, how much do you need? The only way to really know how much you’ll need to retire is to map it out. This is done by creating a financial plan, which is a roadmap for the rest of your life from a financial perspective.

Here are the basics of what your financial plan should include:

  • Cash flows for the rest of your expected lifetime and that of your spouse
  • Social Security assumption (how and when you’ll claim your benefits)
  • Health insurance and Medicare costs assumptions
  • Tax projections (adjusted each and every year)
  • Inflation assumptions
  • Monte Carlo simulations with varying return assumptions for each year’s portfolio performance
  • Analysis of potential events that could impact your plan, such as: What if Social Security pays 80% of the benefits promised? What if one of us has a long-term care health event? What happens if one spouse passes away early? What happens if there is a bear market in our first year of retirement?  These are only some of the scenarios that should be analyzed.

Here are two case studies to give you an idea of how much is really needed given some different assumptions.


First, consider one dual-income family with a household income of $300k:

Retirement age: 63, and planning for a retirement that lasts until age 95

How much they’ve saved: $52k into 401(k)s annually

How much they’ve paid in taxes: $62,500 annually

How much they’ve paid for their mortgage: $36,000 annually, and they’ve paid it off prior to retirement

Living expenses while working: Approximately $150k annually (not including taxes, mortgage and 401(k) contributions)

Social Security benefit: Approximately $70k annually ($30k benefit for the wife, starting at age 66; $40k benefit for the husband, starting at age 70). Remember, after the first spouse dies, the smaller Social Security benefit goes away. It’s very important to claim Social Security to maximize the success of your financial plan.

While many people think they’ll spend less during retirement, we see most clients go through an initial period of spending more. That does decline somewhat over the course of retirement, but it’s helpful to know that factors such as inflation and medical expenses can sometimes cause retirees to spend more than when they were working. When helping clients prepare their financial plans, we like to assume expenses will continue until retirement is over. Depending on the client, we will use age 90, 95 or even 100, to map out our plan and determine how strong our plan is.

In the case of this couple, they will spend more on travel and medical costs than they did in their working years: $8k more on travel and $12k more on Medicare policies.

Investment returns will most likely be much lower for the next 10 years given where current valuations are and where interest rates are. Monte Carlo assumptions should reflect this environment we are in. These clients are assumed to have a 50/50 portfolio (50% aggressive assets, 50% safer assets).

$5 million: Taking all the above into consideration, that’s how much this couple will need in 401(k) assets to make it through retirement. Remember, 401(k) assets are pre-tax assets that will be taxed when distributed from the 401(k). If this couple had ROTH assets or taxable assets, they would likely not need as much saved to create the same successful result. The composition of accounts has a big impact on the taxes paid throughout retirement and can have a significant impact on the retirement outcome.


Next, consider a business owner that sells his business in order to retire:

He has invested all extra savings back into the business over his lifetime, so he has no other savings.

We’ll use the same assumptions as in the above example, except we’ll use all the proceeds from the sale of his business to fund a taxable account.

Retirement age: 63, and planning for a retirement that lasts until age 95

Living expenses: $140k annually, inflation-adjusted each year (assuming 2.5% inflation)

Travel expenses: $18k annually until age 80, inflation-adjusted each year (assuming 2.5% inflation)

Medicare expenses: $12k annually, adjusted at 6% per year

In order to have a high level of confidence his plan will be successful, this business owner must sell his company for $7.25 million. He sells the business as an asset sale and pays an effective tax of 35% on the sale. The business owner will also have to pay the business broker to sell the business as well as other professionals to help with the sale transaction. Total proceeds from the sale are $7.25 million, and his net is $4.5 million after taxes and broker fees.

It takes $4.5 million invested in a taxable account to provide for the above assumptions.

As you can see, retirement is very individualized. Some folks may be able to get by with $1 million. However, we think many people will need much more than this in order to live a lifestyle similar to that of when they were working. The only way (in our opinion) to truly know what you’ll need in retirement is to create a financial plan.

Ironwood Wealth Management is well equipped to help you create your own individualized financial plan. Find out what you’ll need in retirement by setting up an appointment today.