40% of Americans plan to retire with $1 million or more—it might not be enough

A million dollars isn’t the symbol of wealth that it used to be, but saving that much for retirement is still rare.

Just 16% of retirees say they have more than $1 million saved, including all personal savings and assets, according to the recent CNBC Your Money retirement survey conducted with SurveyMonkey.

In fact, among those currently saving for retirement, 57% say the amount they’re hoping to save is less than $1 million. It’s unclear whether those folks are being realistic about their ability to save, or if they think they’ll be able to get by on less.

To be fair, it’s not easy to think of your retirement being funded by one, big dollar amount.

When planning for clients’ retirement, financial planners typically recommend working in the opposite direction. First you think about how much annual income you’ll need to fund the lifestyle you want when you’re no longer working. Then, after factoring in other sources of income, such as Social Security or a pension, you can determine how much you can safely withdraw from your portfolio to cover the difference.

And “safely” is the key word. If you withdraw money from your portfolio too fast, you drastically decrease the chances that the money will last for your entire retirement. Under a classic rule of thumb, you might take out 4% of your portfolio’s value in the first year, and continuing to take out that amount, adjusted for inflation, thereafter.

Say you want to pay yourself $100,000 a year from your portfolio in retirement. Divide that figure by 4%, and you’ll arrive at the amount you’ll need to retire with: $2.5 million. If you plan to retire with $1 million, by the same calculation you can expect to withdraw $40,000 in your first year.

How much retirement income you’ll actually need depends on a number of factors, including your lifestyle, life expectancy and the amount of medical care you’ll need.

“There’s kind of the general guideline that about 80% of what you spend today is what you’ll probably spend in retirement,” says Jamie Bosse, a certified financial planner and senior advisor at CGN Advisors in Manhattan Kansas. “But we find that it kind of varies during the retirement years. That first decade or so is more expensive because people are checking things off their bucket list.”

Bosse’s and other advisors’ logic is based on the idea that certain major, fixed expenses go away for many retirees. After all, whatever percentage you were previously socking into savings accounts can now safely be spent. Some other expenses — like putting kids through college or paying down a mortgage — may come off the books by the time you retire, too.

But some planners say you’d be wise to assume a status quo when it comes to your spending. “The school I subscribe to is you’re going to actually maintain the same standard of living,” says Gerika Espinosa, a CFP with DMBA in Salt Lake City, Utah. “You might switch out your mortgage payment for a medical premium payment.”

Plus, she says, you’re unlikely to be pinching pennies in lieu of going on trips or visiting grandkids more. “In my experience, it’s very, very difficult for people to take a standard of living decrease.”  

If you’re planning to maintain your standard of living in retirement — or even slightly decreasing it — think about what you’ll have to save to make it happen.

Remember, the U.S. government will theoretically help. Assuming you claim Social Security at full retirement age — 67 for those born after 1960 — your benefit is designed to replace about 40% of your annual pre-retirement earnings. Wait until age 70, and Uncle Sam will bump your benefit by 8% per year.

Still, with private pensions all but extinct, you’ll have to rely on withdrawals from your savings to cover the rest. With that in mind, depending on your income, socking away $1 million or more by the time you retire may seem less like a lofty goal and more like a necessity.

“Now more than ever, your future financial independence is directly related to your ability to save a portion of your income now for retirement,” says Bosse. For younger people thinking about these questions, she says, “it’s about how we can balance living well today with saving and planning for the future.”

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