Do You Need $1,000,000 to Retire?

The myth of needing $1,000,000 in retirement savings resides in the same camp as drinking 8 glasses of water a day–both numbers are widely assumed to be truisms although no one even knows where they originated.

How much money one needs for an acceptable retirement is not a one-size-fits-all equation. The answer boils down to individual factors like future lifestyle expectations. If your home is paid for and you’re content to live frugally with minimal travel, your financial needs will be much less than someone who plans to continue living large all the way to the grave and is in debt up to his eyeballs.

What about health? While it is impossible to predict what may happen down the road, someone entering retirement with robust health would be wise to anticipate a longer than average lifespan and budget accordingly.

But as it turns out variables like these really don’t matter because for the average American reaching a million dollar savings goal or anything close to it is all but impossible.

Assume a guy is 28 years old and wants to retire at 65. With a 4% annual rate of return he would need to save $1000 a month for all 37 years. But the average income at age 30 is only $3000 a month before taxes. How is this person going to sock away over one-third of his net pay when he’s just getting started in life?

“Oh,” you say, “he’ll save what he can early on and make up for it in his peak earning years.” Not so much. At age 50 the average annual salary is less than $5000 per month, or around $4000 take home pay. This is the time in life when kids are often in college and budgets are generally stretched to the limit, so saving extra for retirement is not in the cards.

And keep in mind these numbers don’t even take inflation into consideration. At a 3% inflation rate $1,000,000 in 37 years will be worth the equivalent of $335,000 in today’s dollars. To have a “real” million bucks at retirement our 28-year-old will need to save over $3000 a month for 37 years. Yikes!!

Financial experts can shout from the rooftops that a million dollars is the gold standard for retirement savings. The bottom line on the retirement “crisis” facing Baby Boomers is that the numbers just don’t add up. According to the Economic Policy Institute, most Americans at age 55, in spite of their best efforts, have less than $125,000 saved.

What to do? There are really only three options:

  1. Resign yourself to being miserable and broke in your retirement years.
  2. Follow the advice of those same financial experts who tell you to work WAY longer than you ever expected and drastically cut back your current lifestyle so you can save like crazy. Sadly with this plan you very well may be too old, too tired, and perhaps too sick to enjoy the few years you have left.
  3. Think of something else–something bold–something creative–something outside the box.

The global economic meltdown of 2008 unexpectedly brought us face to face with the same financial challenges of so many Baby Boomers today. Our “something else” was finding a lower cost of living by moving abroad.

Since relocating to Ecuador we’ve created an exceptional lifestyle funded by our Social Security benefits. This has allowed our savings to continue to grow instead of being depleted with each passing year. Quite a turnaround from the doomsday trajectory that appeared to be our future.

Living in another country isn’t for everybody. But Baby Boomers with inadequate savings must quit worrying about the lofty myth of needing $1,000,000 and focus instead on finding whatever “something else” will allow them to enjoy the retirement they deserve after working hard for so many years.

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