The notion that one million dollars makes you rich is a prevalent, yet dangerous one. If you were to spend like the Barenaked Ladies, you would be a homeowner with a Picasso collection, full-time limousine driver and band of exotic pets. But if you make six figures a year and are hoping to maintain your current lifestyle for 20+ years in retirement, one million dollars will leave you significantly short of your retirement needs. Many greatly underestimate the savings required to live comfortably throughout retirement, and while one million dollars sounds like a lot, it’s unlikely to sustain a significant amount of retirement savers.
Consider the following scenario: a 40 year-old planning to retire at 65 wants to replace 80% of his income in retirement. He makes $100,000 annually, and has a current balance of $100,000 in his 401(k). In keeping with the general rule of thumb, he contributes 10% of his salary to his account per month, and his employer matches 3%. According to DST’s Retirement Planner, which we analyzed in our recent white paper comparing ten publicly available retirement income projection tools, this participant would have an account balance of over $1,300,000 at retirement—30% larger than our established “rich” level of $1,000,000. Yet, by age 80, his savings would be completely depleted. Thus, even someone on pace to have well over one million dollars, supplemented by Social Security, will be forced to live off Social Security benefits alone for the remainder of his life. Living off of Social Security benefits is a highly unrealistic prospect for most people—something we discuss in another recent white paper analyzing online Social Security calculators.
DST Retirement Planner Results Report – Projected Assets Graph
DST Retirement Planner Results Report – Retirement Income Sources Graph
Inaccurate perceptions about money that result in false confidence—such as the idea that one million dollars makes you rich—are detrimental when it comes to preparing for retirement. Therefore, we strongly encourage participants to ensure they understand their retirement projections, expenses and shortfall. Whether by talking with a financial advisor, or using the retirement income projection tools on recordkeepers’ websites, knowing where you stand is the critical first step to successful retirement planning.