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One million dollars is a nice round number to have saved for retirement, and it’s long been the target amount financial experts recommended if you wanted to live comfortably in your later years. The argument is that if you retire at 65 with a $1 million nest egg, it should last you for the rest of your life. However, figuring out whether you have enough money requires more than just punching numbers into a calculator. There are several other factors to consider that can influence how far your savings will stretch. (For more, see Retirement Planning Basics.)

People Are Living Longer

Thanks to improvements in healthcare and a general increase in Americans’ standard of living overall, men and women are seeing their life expectancy grow longer year over year. Fifty years ago the typical adult male could expect to live to the ripe old age of 66.7 years. Women, who statistically live longer on average, had an average life span of 73.8 years.   

Today those numbers have increased dramatically. According to the Social Security Administration, a man turning 65 today has an average life expectancy of 84.3 years, while women reaching that age are living to 86.6 years. The SSA estimates that one in four 65-year-olds will live past age 90, and one in 10 will pass the 95-year-old mark.       

Over the course of five decades the average life span has increased by 17.6 years for men and 12.8 years for women. If that continues, today’s generation of Millennial 20- and 30-something savers could see their average life expectancy stretch well into their 90s. In that context, $1 million in the bank may not be enough to provide a comfortable retirement.    

For example, let’s say you retire at age 66 with $1 million in savings and choose a conservative asset allocation that yields a 5% annual return. You anticipate living another 20 years, so you use the 4% rule to calculate your withdrawals. Even with a 3% inflation rate factored in, you’d still have nearly $730,000 remaining in your retirement account by age 86. If you were to live an additional 10 years, however, your retirement balance would dwindle down to just over $16,000. (For more, see Why the 4% Rule No Longer Works for Retirees.)

“Increasing life expectancy without a similar increase in our working lives means that we must extend our retirement resources farther than before,” says Mark Hebner, founder and president, Index Fund Advisors, Inc., in Irvine, Calif., and author of Index Funds: The 12-Step Recovery Program for Active Investors. “Spending $1 million over 20 years affords approximately a $50,000-per-year lifestyle and only $33,333 over 30 years, which is quite different.”  

​The Cost of Living Keeps Growing

Using the aforementioned 4% rule, you’d be able to draw $40,000 in income from your retirement account the first year. That doesn’t include any supplemental funds you receive from Social Security benefits. As of June 2017, the average monthly benefit paid by Social Security came to $1,254.78. If you received those benefits for the entire year, your total income for your first 12 months in retirement – including both the income from your retirement account and Social Security – would come to $55,057.36. That sounds like a reasonable, even comfortable, amount of money to have for retirement, but it may not be enough to counteract the rising cost of living.     

According to the Bureau of Labor Statistics, mean household spending for seniors in the 65 to 74 age range comes to $48,885 annually. By 85, the mean household expenditure total drops to $36,673, but healthcare costs account for a larger share of spending. Currently, a 65-year-old retiree couple can expect to spend $266,589 on healthcare out-of-pocket over the rest of their lifetime. That’s assuming that they’re both in good health and that they have Medicare Parts B and D, along with supplemental health insurance.      

On a monthly basis they’d be paying $583 for healthcare starting at age 65; by 85 the monthly total would more than double, to $1,211. With housing, transportation and food becoming more expensive, inflation going up and the couple living longer, there’s a good chance that $1 million isn’t going to be enough to help them sustain their standard of living. Research from LIMRA (previously known as the Life Insurance Marketing and Research Association) shows that inflation at, let’s say, 3% could alone eat up as much as $117,000 of retirees’ spending power over time.    

Workers’ Savings Aren’t Keeping Pace

Survey after survey suggests that Americans are falling short where their retirement savings are concerned. According to the National Institute on Retirement Security, the median retirement balance for all working-age households is just $3,000. It climbs to just $12,000 for near-retirement households, which is a pretty scary number. The most recent Retirement Confidence Survey from the Employee Benefit Research Institute found that 64% of workers admitted to being behind schedule on saving. By the same token 22% of workers are very confident about their retirement prospects, while 36% said they were somewhat confident that they’ll be able to save enough.      

When you consider the numbers, the question shifts from “Will $1 million be enough?” to “Is it even possible to save $1 million for retirement?” ​If you’re delaying saving enough, either because you’re paying down student loans or you’re just putting the minimum into your 401(k), you have to be realistic about how much money you’ll be able to accumulate. The longer you put it off, the more of your income you have to set aside to catch up, which puts even greater pressure on your budget. In the meantime you’ve missed out on the compound interest you could have been earning if you’d gotten started sooner.

“When dealing with younger people in their 20s and 30s, I always show them a simple concept: the time value of money,” says Peter J. Creedon, CFP®, CEO and founder of Crystal Brook Advisors, New York, N.Y. “Take a person who puts away $5,000 a year, averages 8% return and retires at 68. If they start at age 25, with 43 years to contribute, they should have a little less than $1.65 million. A 35-year-old, who has 33 years to contribute, should have almost $730,000. A 40-year-old, with 28 years to contribute, will have about $477,000. The moral of the story: Start early and contribute, since time is your best friend and enables compounding to work for you.” (For more, see Delay in Retirement Savings Costs More in the Long Run.)

“It’s hard for 20-somethings to think about retirement,” says Marguerita M. Cheng, CFP®, CEO of Blue Ocean Global Wealth in Rockville, Md. I position it as wealth accumulation. For example, a 34-year-old client (his parents are my clients) started a Roth IRA 12 years ago. Fast forward to 2016, he used $22k of  his $34k as a down payment to purchase his first home. At age 22, he wasn't thinking of retirement, but the Roth IRA helped him build wealth for his life financial goals and retirement. For younger clients, it's important to focus on wealth accumulation, rather than just retirement.

The Bottom Line

Saving $1 million for retirement is a lofty goal, and though it may seem like a fortune, it only goes so far when things such as inflation, cost-of-living increases and longer life expectancies come into play. Raising that number to $2 million or more might be something Millennials have to consider seriously if they don’t want to run the risk of ending up broke in retirement.



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