Part I of our “Have I Saved Enough?” series
By Jeff Herman
If you have accumulated $1 million in your 401(k), you have accomplished something significant.
But is $1 million enough to retire?
The honest answer is: maybe.
Your 401(k) balance alone cannot tell you whether you are ready. The answer depends on the lifestyle you want, your Social Security benefits, other assets and income, taxes, debt, and healthcare costs.
The most important question is not simply, “How much have I saved?” It is, “How much income can those savings reasonably produce?”
Your savings total is an input. Your retirement-income plan provides the answer.
Calculate the Income Your Portfolio Must Produce
Start with the life you want to fund.
How much will you need each month for housing, food, transportation, healthcare, and other essentials? How much do you expect to spend on travel, dining, hobbies, gifts, and other priorities?
Next, identify the predictable income you expect from Social Security, pensions, and other sources.
The difference between that income and your anticipated spending is the amount your 401(k) and other investments must provide.
For example, if your desired lifestyle requires $8,000 per month and your predictable income provides $5,000, your portfolio must supply the remaining $3,000.
That income gap—not the size of your 401(k) by itself—is the number your retirement strategy must address.
Why You Should Calculate the Gap Before Retiring
Recent Vanguard research demonstrates why this calculation should happen before the paycheck stops.
Vanguard estimates that only 40% of workers between ages 61 and 65 are on track to generate enough sustainable income to maintain their lifestyles in retirement.
The median person in that group is projected to face an annual spending shortfall of approximately $9,000—equal to 24% of anticipated retirement needs.
That is roughly $750 missing from the monthly retirement paycheck.
Identifying a potential gap before retirement may provide time to save more, reduce debt, adjust spending, reconsider the timing of Social Security, or reposition investments to align with future income needs.
A retirement shortfall is not simply a missing number on an investment statement. It represents expenses your retirement income cannot support.
BLOG | YOU’VE BUILT THE WEALTH. NOW IT’S TIME TO MAINTAIN THE GAIN
Your 401(k) Has a Different Job in Retirement.
While you are working, your 401(k)’s primary job is generally to grow. Your paycheck covers your current expenses, and you may have time to recover from market declines.
Once you retire, the account must do more. It may need to:
- Generate dependable income
- Maintain liquidity for unexpected expenses
- Preserve resources for later years
- Keep pace with inflation
- Withstand market declines without forcing poorly timed decisions
- Continue supporting a surviving spouse
The investment strategy that helped you accumulate $1 million may not be the same strategy you need to transform it into a reliable retirement paycheck.
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Five Questions to Determine Whether You Have Saved Enough
Before deciding whether $1 million is enough to retire, you should be able to answer five questions:
- How much income will my desired lifestyle require each month?
- How much predictable income will Social Security, pensions, and other sources provide?
- How much must my 401(k) and other investments produce to close the gap?
- Where will my spending money come from during a prolonged market decline?
- How will the income plan adjust as my expenses, health, and family circumstances change?
If those answers are unclear, your retirement plan may not be finished.
So, Can You Retire With $1 Million?
Possibly—but the balance alone is not enough information.
You need a plan to transform those savings into income that can support the life you want.
Ask your advisor to show you, in real dollars, how much monthly income your $1 million portfolio may reasonably support. Ask where that income will come from, how taxes may affect it, and what happens during a difficult market.
The next question is how to make that income last. In Part II: “7 Steps to Create a Retirement Income Strategy for 35 Years or More,” we examine how to prepare your income plan for longevity, inflation, market volatility, and other risks that can grow over a long retirement.
At The Jeffrey Group, we help individuals and families determine whether what they have accumulated can support the life they want in retirement. If you are asking, “Have I saved enough?” or would like a second opinion on your retirement income strategy, we welcome the conversation.
