$1 Million Is Not Enough: How Much Do I Need to Save for Retirement? (Updated Apr. 2023)
Topics: 4% Rule, 15% Rule, 50/30/20, Retirement vs. College, Retirement Formula: Take Action
I’m continuing the trend of looking back at some of my early post titles and completely rewriting the story. I previously started with this post: Taxes and Fees: Why You Should Use a Financial Advisor for Asset Management, which was based on my VERY FIRST post. The new version focused on the fees you pay for your investments and your overall tax strategy – with the punchline being that you should enlist professional help to make sure you’re not leaving money on the table.
So today I’m updating a blog post that follows the first post I wrote with the word “Retirement” in the title – the original version: How Much Money Do I Need to Save for Retirement?. Admittedly, this original post was a bit “math heavy,” which I’ll (mostly) avoid this time, but there are Four Numbers Worth Sharing:
- $1 million (it’s not enough)
- 4% rule (or 25x rule) – translation is you need 25x your spending now to get to retirement
- 15% rule – a study from Fidelity suggesting you must save 15% of pay to get to retirement
- 50/30/20 – a budgeting plan suggesting 20% of your budget is for savings (or debt reduction)
Before we get into the details:
- Our Personal Services are designed to help you establish goals and understand the probability of achieving those goals. We can manage the multiple household accounts within your portfolio to work toward those goals.
- If you’re curious about your net worth, ready to start your Financial Plan or outsource your Household CFO duties, start here by creating your own Right Capital login.
- If you’re focused on cost cutting and budgeting, check out our Cash Flow Management service and this post: How Do I Get Out of Credit Card Debt and Start a Budget? You can also sign up for Free expense tracking.
- If you have other needs or questions about your finances, please email me: firstname.lastname@example.org.
On a personal note
I can’t say that I’ve strictly followed savings rules. The 15% Rule, 50/30/20, etc. If you recall, the initial version of this post discussed a study by Fidelity that suggested saving 15% of your paycheck (starting at age 25) would allow you to retire at “retirement age” of 67(!). The 50/30/20 Rule we discussed in our post on Budgeting says 20% of your budget should go to savings or debt reduction.
In the last 20+ years since I started collecting a real paycheck, there have been many purchases, several of them house-sized (literally), plus starting a family. So 20 years of overspending, then getting back to even, then trying to save for the next big event. My business continues to evolve and we are often caught riding the economic wave, so balancing savings according to a set of rules and building a business (or just surviving) presents challenges. But it's good to have goals to make sure our savings rate is on track. Plus as many of you know, I’m really looking more toward Financial Independence than “Retirement.” Which is to say we have a plan for our savings and investing. I encourage you to get your Financial Plan going today!
Being a millionaire sounds amazing, but is $1 million enough to retire? No it isn’t. That’s based on the 4% Rule (so many rules) as we noted in our post on Financial Independence that suggests spending 4% of your portfolio annually will provide an extremely high likelihood that your money will last 30 years. So saving a $1 million for retirement, suggests $40,000 in annual spending (about $3,300/month). That’s not a lot of money. Is that what you spend now?
Furthermore, the 4% Rule has also come under some scrutiny as asset classes (looking at your 2022 performance, stocks and bonds) that are supposed to provide diversification undergo periods of higher correlation resulting in lower expected returns, particularly as it relates to the sequence of returns (i.e. starting out retirement with a year where your portfolio is down 20%).
An easy rule of thumb is that you will likely spend in retirement what you spend now. That assumes travel and healthcare in the future ultimately offset saving for retirement, supporting kids and your mortgage – things you pay for now. Going back to the meager $3,300/month income calculation, a study noted long-term assisted living costs range from $3,000-$6,000/month and nursing home care from $5,000-$10,000/month. Are you self-insuring for that? Or are you going to live with your kids? Otherwise $40,000 a year probably won’t cut it. If you think, you need $100,000 in retirement, you’re looking at a nest egg of $2.5 million!
Time Value of Money
I had to bring out the math to prove my point. Sorry. The orange line is for someone maxing out their 401K today ($22,500 annually, or $1,875/month) – investing that amount for 30 years gets you to nearly $2.3 million in 30 years (or 360 months). Not bad. The blue line is for someone saving $3,000 annually or $250/month (for example someone making $100,000 and contributing 3%) – in 30 years you have $300,000 – yikes. Both examples assume 7% annual returns. So, my point is you have to save a lot of money for a long time to get to a place of comfort.
Retirement vs College savings – where do I save?
Speaking of saving, there are several things we adults are saving for: Retirement and College are two big ones. The initial version of this post wasn’t very high-ranking in terms of readership. Middle of the pack. I thought more people would care what I have to say about retirement. I was further surprised to know that a similar post (How Much Should I Save for College?) was more widely read. The implication then is that more people are concerned with saving for college than retirement. That makes sense, kind of. Paying for college for our children will most likely come before trying to get to retirement. And your HR Administrator at work is probably forcing you to at least look at your 401K but no one really prompts you to save for college, so maybe college planning isn’t as straight-forward. However, you can’t sacrifice saving for retirement to fund college. You can finance college with loans – not true with retirement. We would do everything for our kids – that should include not being a burden to them in the future.
So what’s the formula for reaching retirement?
There isn’t a one-size-fits-all formula, but step one is to take action. My hope is that you move your personal finances up the To Do list. Act with a sense of urgency – at least to know where things stand today. Let me encourage you to save NOW for retirement. You need to know your savings rate and have a plan. All the Personal Services we offer are geared toward this.
We help you establish goals and calculate the probability of achieving your goals, then make necessary adjustments to make sure you’re on track.
What about your old and current 401Ks? What about your spouse’s 401K accounts? Your IRAs and taxable accounts? College planning? Are these multiple retirement and savings accounts working toward a common goal? Are they properly diversified? Are they tax efficient? We handle the challenge of portfolio management across your household’s accounts to work toward a common set of goals.
Please check out more popular/related blog posts:
As well as other more recent posts:
If you or someone you know has any financial-related questions, I would love to have a conversation, so please feel free to reach out: email@example.com.
And stay tuned for additional blog posts on retirement savings and other topics.
Best wishes on your financial path!
This post was created by Matt Beeby, the Founder of MHB Advisory Services. Matt has been working in Financial Services and investing in real estate since 2005, though his investment experience spans nearly two decades. He is a Christ follower, active in both his church and his neighborhood association. Matt enjoys sports and family time. Read more about Matt on his website bio.
- Information contained in this document is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any product or security.
- This information is believed to be accurate and should not be considered tax or legal advice.
- Please consult tax or legal professionals for such advice and be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed.
- Investments involve risk and are not guaranteed to appreciate, and past performance is not indicative of future results.