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$1M Is No Longer the Standard Nest Egg

By Gabrielle Olya

Here’s how much most Americans think you actually need to retire

A common financial rule of thumb is that you should have $1 million saved for retirement, but this piece of advice may now be outdated — you may actually need roughly double that. At least, that’s what most 401(k) plan participants believe.

A recent survey conducted by Schwab Retirement Plan Services found that on average, plan participants think they need to save $1.9 million for retirement. But how accurate is this number?

Nathan Voris, director of business strategy at Schwab Workplace Financial Services, thinks that the survey participants have a pretty accurate idea of how much they will need in retirement. “I think for a survey like this, that’s a pretty good number,” he said. “That’s a ballpark range for a wide range of folks. Obviously, retirement is not one-size-fits-all, but that’s sort of the middle of the range for a lot of people.” 

As Voris notes, there are numerous factors that will affect how much someone will actually need in retirement, so some may need more and others may need less. 

“There’s so much written about that, but I boil it down into just a couple of things. One is, when do you want to retire?,” Voris said. “If you’re going to retire at 50, you need to plan for 45 years of living expenses. If it’s 67, you need to plan for 30 years. That has a huge factor in what your plan should be.”

“One of the other levers is, what lifestyle are you going to have in retirement?” he continued. “Where are you going to live? Are you going to live in California or Wyoming? Think about the state tax perspective. Are you going to have an active lifestyle? Or are you living close to grandkids where you’re going to be pretty local? There’s a lot of factors in what level of lifestyle you want to live in retirement.” 

Finally, how much you need to have saved for retirement will depend on your other sources of income in retirement. This includes Social Security, pensions, assets and inheritance. “Those kinds of things can be a factor in what the retirement future looks like,” Voris said.

Why $1 Million Is No Longer Enough

There are a number of factors that may require retirees to have a larger nest egg saved up, but one of the main ones is that people are living longer in retirement. “Retirement could be a long time,” Voris said. “That idea of 20 years in retirement, that was maybe tied to that $1 million number. That’s sort of not a realistic expectation anymore. That 4% rule, that $80,000 income bogey is still out there, but you could be retired for 25, 30, 35 years.”

“If you tell someone they need to save $1.9 million, that can be daunting on the surface. But there’s a way in which you do that through planning and decision-making processes that makes it attainable,” Voris said. 

The first step is simply making the choice to be an active participant in your financial planning. “Be your own advocate. Be engaged. Start early. Take it seriously. Have a plan,” Voris said. “The attitude toward finances in retirement when you have a plan versus not is night and day.” If you’re just starting out, be sure you’re not leaving any free money on the table. “Make sure that you’re getting every penny that your employer offers, whether that’s a 401(k) match or that’s a stock purchase plan discount or HSA contribution match — all of those assets that are free. Don’t leave any of them on the table,” Voris said. “Approach open enrollment in that mindset, and make sure that you’re leveraging the most from your employer.”

Voris said to also be mindful of debt, which can derail your retirement savings plans. “Be mindful of credit card debt, be mindful of healthcare debt and have a debt plan if you have multiple cards or you have a car loan,” he said, noting that your plan should be focused on paying down high-interest debt first. You should also have an emergency savings fund so that you do not have to take on more debt or tap into your retirement savings in case the unexpected strikes.

“Practically speaking, for someone who is on the edge of being financially secure, a life event can be disastrous,” Voris said. “If the car breaks down or you accrue some medical debt or you get behind on rent — those kinds of things can really throw a wrench in things.” Having three to six months’ worth of living expenses saved can keep you on track with your retirement savings plans even if something were to happen.

Next, Voris said to ask for help coming up with a plan to meet your retirement goals. The Schwab survey found that only 40% of 401(k) plan participants felt very confident in investment decisions made on their own, versus 56% who felt very confident in investment decisions made with professional help. “Take the advice that’s offered,” Voris said. “Most 401(k) record keepers have advice and financial wellness accounts, and those things will help a person build a plan. Have an engagement partner, have a sounding board. Increasing your confidence increases your ability to be successful from a savings and investment perspective.”

Lastly, keep in mind that $1.9 million is a long-term goal — it’s not a lump sum you’re expected to save up overnight. “If you think about someone who is 24 or 25, that’s a 35- to 40-year work savings career,” Voris said. “It seems daunting — that’s a big number — but the ability to get there if you have a plan and if you’re saving over a 30-, 35-, 40-year period, it’s attainable. That $1.9 million [goal] should empower you to make small steps and right decisions incrementally.”