When I started saving for retirement in my 20s, I used to roll my eyes every time I looked at my pay stub and saw a deduction for my 401(k) contributions. At the time, it was hard to appreciate my efforts, knowing how far away retirement was.
Now, a couple of decades later, I'm extremely grateful that I pushed myself to start contributing to a retirement account at a fairly young age. There was a point when I thought a $1 million nest egg would be more than enough to carry me through my senior years, but I've since realized that $1 million probably won't cut it for me.
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The problem with $1 million
As of 2022, the average retirement account balance among Americans aged 65 to 74 was about $609,000, per the Federal Reserve. Because the stock market has done well since then, it's fair to assume that if the Fed were to update that number today, it would be higher. However, it probably wouldn't be $1 million.
In light of that, you'd think I'd be happy with a $1 million nest egg. But I worry that it won't be enough for a few key reasons.
First, if I use the 4% rule to manage my retirement savings (which I'm not sure I will, but that's a different story), a $1 million balance leads to roughly $40,000 per year. I'm not afraid to admit that I'm used to living on considerably more. And while it's common to take a pay cut in retirement, there's a limit as to how large a pay cut I want.
Second, I expect Social Security to pay me a monthly benefit in retirement. But because the program is facing potential cuts, it's hard for me to determine how much income I'll get out of it. And I have to brace for the fact that my monthly benefit may be slashed due to reasons beyond my control.
There's also healthcare to consider. Fidelity expects the average 65-year-old person to spend $157,500 on healthcare in retirement, as of 2023. But because the cost of healthcare has been rising so rapidly, that figure might easily double by the time my retirement rolls around. If so, and I retire with $1 million, I'm looking at spending about one-third of my savings on healthcare, and that doesn't even include long-term care.
Finally, the past few years have shown me that inflation is a beast that's hard to reckon with. The inflation levels we've seen since 2021 aren't the norm, but no one can rule out another extended period where living costs rise rapidly. I want more savings so I'm equipped to deal with something like that at a time when I may not be working.
I'm doubling my savings goal -- but whether I get there is up in the air
Clearly, I have some concerns about retiring with only $1 million. But another reason I'm aiming higher is that I don't want money to be something that holds me back at that stage of life.
I want the flexibility to live anywhere I want and spend my time any way I want. And I'm willing to make sacrifices now to give myself those options.
As such, I'm pushing myself to work toward a $2 million retirement nest egg. Will I get there? I don't know.
A lot will depend on factors that include the investments I decide to hang onto and the way the stock market performs. It'll also hinge on my income and the extent to which artificial intelligence (AI) chips away at my career (something that's a big fear of mine, if I'm being honest). The less I'm able to earn, the less I'm able to save.
You might read that if you retire with $1 million, you're set for life. And a $1 million nest egg is something to be proud of. But before you decide that it's the number you're targeting, think about whether it really will work for you. You may decide that it's best to aim higher.
