Is $1 million enough to live on during retirement? What if I only have half a million? Would $10 million be enough, or can I get by with $250,000?
You see this question asked and answered in personal finance articles all the time. In reality, however, this question is really like asking how many M&Ms someone should eat in a week. The answer varies by person, and while there may be some solid guidelines to go by, there's no actual correct answer. Your retirement picture (just like your potential M&M consumption) depends on your specific needs.
How much will I need in retirement?
Before you can pick a number, you need to understand what your retirement expenses will be. Are you going to move someplace cheaper when you retire, or will you be maintaining essentially the same lifestyle? Do you plan to travel? Will you be moving to a state with a lower cost of living, or splitting your time between multiple locations?
The problem for many people in their 20s, 30s, and 40s, even their 50s or 60s, is that they don't know the answers to these questions. If you know you plan to move from an expensive place to a more affordable one, then you can make some retirement saving decisions.
In reality, many people save for retirement without actually knowing what their retirement will look like. That makes sense, because it's hard for anyone to know what they may want their life to look like decades from now. It's also impossible to know whether you may experience health problems or hit some other problem that changes your equation.
How do you plan for the unexpected?
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Nobody has ever retired and lamented having too much money. That means that as a basic guideline, you should make an effort to save as much as you can. Doing that will give you more options, and may allow you to retire early if you decide you want to live someplace that's cheaper than where you spent your working years.
It's a smart idea to make a retirement budget and update it every few years. Examine what your major costs (housing, medical, food, transportation, and others) will be, and base your numbers on actual research.
You don't need to be precise, but if you plan to move from a $500,000 single-family home in New York to a more modest condo in Florida, it's not a bad idea to look at what that condo might cost you, along with making a reasonable guess at your potential living expenses.
If you save $1 million, you could spend roughly $50,000 a year without drawing down your principle (that assumes a 5% annual return on your investments). Add that to the $17,748 a year the average senior citizen collects in Social Security and you would have an income of just under $70,000 a year (plus you can start spending some of the principle once you get older).
For some people, that amount of money would make for a very comfortable retirement. For others, "only" having $70,000 to spend a year may involve making major lifestyle changes.
It's fair to say that most people will want to have a similar standard of living in retirement as they did while working. They may be willing to live in a smaller home and/or in a cheaper place to live, but someone who liked going out to dinner multiple nights a week probably won't start enjoying more frugal meals at home just because he or she retired.
Coming up with how much you need for retirement requires knowing yourself and doing your homework. It's a number you need to revisit regularly, while remembering that it's always better to save more than you need if you find yourself nearing retirement well behind your goals.
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