A seven-figure nest egg may seem like a dream for many who struggle to save for retirement. After all, having $1 million or more in investment accounts makes you a millionaire, and that term is usually synonymous with wealth in the United States.
But will everything be smooth sailing if you have seven figures saved? Is $1 million enough to ensure you are financially secure throughout your retirement, or do you need multiple millions to make certain that your later years are truly free of financial worries?
Let’s take a look at what a seven-figure nest egg really means for you once you no longer have paychecks coming in.
Is a seven-figure nest egg really enough for a secure retirement?
To understand what a seven-figure nest egg means for you as a retiree, it’s worth looking into the amount of income that you’d actually generate if this is the amount you had saved in your 401(k) or other retirement plans.
If you have $1 million invested, and you follow the 4% rule, then you would end up being able to take out $40,000 from your investment account in the first year of retirement. The 4% rule is a simple rule of thumb aimed at making sure your money lasts for at least 30 years once you start drawing from your retirement plans.
While more recent recommendations advise choosing a 3.7% withdrawal rate instead of a 4% rate, the basic premise is the same. You want to limit how much you take out from your accounts at any one time to reduce the chances that the account balance falls so much that you can no longer earn returns, and you run out of money. With the 4% rule, the limit is 4% in year one, then you can adjust upward to account for inflation.
So, assuming you don’t want to take a more conservative approach, and you hope to follow the standard rule of thumb. The big question becomes whether you feel like a $40,000 annual income is going to be enough to make you financially secure.
Of course, you have Social Security to supplement investment income — if you are ready to claim benefits. However, Social Security replaces about 40% of your pre-retirement income, and the common recommendation is to aim to replace around 80%. This means that if 40% of your income is more than $40,000, you will be below the recommended replacement rate if you have just $1 million invested and plan to follow the 4% rule.
So, if your income is $100,000 or more, then a $1 million nest egg is very unlikely to be enough for you to feel comfortable retiring. If it is less than $100K and you plan to limit your spending after retiring to about 80% of the amount you were earning before you quit, then you are probably in good shape, assuming you’re getting a typical Social Security benefit for a $100K earner.
Other factors that could determine whether a seven-figure nest egg is enough
When you evaluate whether an investment account balance is big enough to support you or not, you need to look beyond the surface level. Many other factors could impact whether seven figures is sufficient to live on.
For example, if you are planning to retire 30 years from now, you must remember that $1 million is not going to have anywhere near the buying power that it does today. Inflation is going to erode the value substantially. So, someone who is planning to retire next week is going to have a different answer to the question of whether $1 million is sufficient savings than someone who is retiring in 2055.
If you are retiring young, then you’ll also want a much larger nest egg. You’ll need your savings to support you for longer, and you’ll need to live off your savings alone until it makes sense for you to claim Social Security. You’ll also have to fund medical care costs until you reach the age when you become eligible for Medicare — and paying for private insurance until you reach age 65 can be expensive.
Lastly, consider whether you want to reduce or increase your spending levels as a retiree.
While many people spend less than they did while working, others spend more because they travel a lot or participate in expensive hobbies, or incur high medical costs. If you expect that your spending may increase, you need to account for that.
So, how can you decide what amount of savings is right for you? You can estimate the amount of income you’ll need your investments to produce and multiply that number by 25 to decide how much to save. This may turn out to be multiple millions, or it may turn out to be less. Either way, doing this calculation is key to ensuring that you have the funds you truly need as a retiree.
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