As the largest living generation in the U.S., millennials are in their prime planning years.
It can be easier to retire with $1 million when you start investing early in life. The more time your money has to compound in the market, the less you have to save out of pocket.
But what does it really mean to be a millionaire at retirement? Here, we take a look at what $1 million can “buy,” and whether it’s enough to sustain a person through their golden years.
How Long Does it Take to Accumulate $1 Million?
Being a millionaire when you retire means having at least $1 million in investable assets to draw on for income. This doesn’t include assets like a house or fine art collection since those aren’t liquid.
Let’s see how much a hypothetical married couple, both age 35 today, would need to save annually to reach $1 million by age 67, the full retirement age for millennials:
Current retirement account balance: $270,000*
Current annual spend: $110,000*
Desired annual retirement spend: $110,000
Required annual savings to reach $1 million: $10,000
*These rounded figures are based on averages for Personal Capital free tools users in their 30s. They were doubled to represent a married couple.
Obviously this couple has been diligent savers thus far. For the next 32 years, they would need to add only $10,000 a year — or about $833 a month — to their investment accounts to achieve millionaire status by the time they retire, according to Personal Capital’s retirement calculator, which uses a Monte Carlo simulation.
We assume the couple wants to maintain their same spending level in retirement, with a 3.5% annual adjustment for inflation. They have a moderate risk tolerance, prompting the calculator to use an 8.2% historical median return. If they start collecting the average Social Security benefit at age 67, the couple’s investment portfolio could last for 20 years.
That may seem suitable, but it doesn’t leave any buffer for higher spending years; the possibility of living past age 87; or the ability to leave wealth to their kids or grandkids. Aiming for at least $1.5 million to $2 million at retirement could put them in a more comfortable position with room for error.
Read More: How to Calculate Your Retirement Number
How Far Does $1 Million Go in Retirement?
Many people aim for this benchmark assuming it will be enough to cover their expenses for 20 to 30 years of retirement. How far $1 million actually goes depends on several variables:
Withdrawal rate: How much you take out of your investment portfolio each year.
Cost of living: The cost of housing, groceries, entertainment, gas, leisure activities, and healthcare can be much higher in certain parts of the U.S., and increase over time.
Inflation: Many standard retirement calculations use a 3.5% annual inflation rate to make predictions. But inflation hit nearly double that rate in early 2021, thanks to lingering effects of the pandemic. A $1 million nest egg doesn’t have much runway when inflation matches or exceeds the rate of return you earn on your investments.
Real rate of return: The historical average return of the S&P 500 is about 10% before factoring in inflation. This matters when you’re estimating the potential growth of your investment portfolio over time.
Taxes: Distributions from pre-tax retirement accounts, such as 401ks and traditional IRAs, are taxed as ordinary income. If you plan to spend $100,000 a year in retirement, for example, you’ll need to withdraw more from your accounts to cover your tax bill. There’s also a strong chance tax rates will change between now and your retirement date. It’s important to revisit your retirement plan periodically to account for any changes.
Asset location: Where you hold your investments has an impact on how long your nest egg will last. Some tax-advantaged accounts require distributions each year, called RMDs, even if you don’t need the money to meet your current financial obligations. Pulling money out of the market reduces your portfolio’s long-term earning potential.
Risk tolerance: Most people tend to shift into more conservative investments once they reach retirement because they can’t afford to lose their shirt in a downturn. That means calculating a new expected rate of return for the retirement years.
Supplemental income or windfalls: Steady income from Social Security or a pension means you don’t have to rely solely on investments to generate income. You might be able to take on more risk in your portfolio if you have other income or windfalls — such as inheritance or proceeds from the sale of a home — to fund your current lifestyle.
Years in retirement: Although we can estimate life expectancy, there’s no way to know exactly how long a person will need their nest egg to last. It’s best to build in a buffer.
Read More: 7 Essential Steps for Retirement Planning
Is $1 Million Still a “Good” Goal for Retirement?
Before aiming for a $1 million retirement, map out your other financial goals and expectations. Factor in things like life expectancy, how much you plan to spend each year in retirement, and estimated inflation, taxes, and expected rate of return. And be sure to consider whether you want to leave wealth for future generations.
One million dollars isn’t a bad goal for retirement, by any means. But it might be too little — or even too much — to meet your specific lifestyle needs. If you’re unsure how to estimate certain costs and set an appropriate savings rate, a financial planner or investment advisor can help.
Want a better way to manage your investments? Millions of people use Personal Capital’s free and secure online financial tools to see all of their accounts in one place, analyze their investments, and plan for long-term goals, like buying a house or saving for retirement.
Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.