Once You Have More Than $1M, Net Worth Doesn’t Matter Anymore

How much money do you need to retire? Your whole life, you’ve been told you need to reach a certain number. Is $1 million enough? It’s easy to focus on reaching a certain savings target. But two people with the same amount saved can have very different retirement experiences. Your retirement savings are important, but how much you spend and how much income you’ll receive will help determine whether you can afford to retire.

Why $1 Million Doesn’t Guarantee a Comfortable Retirement

Having $1 million in retirement savings is a major achievement. However, reaching that number doesn’t automatically mean you’re financially ready to stop working. Consider two households, each with a $1 million investment portfolio.

• Household A needs $60,000 a year to cover its living expenses.
• Household B needs $120,000 a year to maintain its lifestyle.

Even with identical portfolios, their retirement plans will look different. The first household needs half as much annual income as the second. Depending on their other income sources, they may also need to withdraw far less from their savings. So, how much money do you need to retire comfortably? Start by understanding these three numbers.

1. Calculate Your Annual Retirement Spending

First, determine how much you expect to spend each year once you retire. Focus on your actual living expenses after taxes, not your current salary or a percentage of your income.

Your retirement spending may include:

• Groceries, utilities, and other household expenses
• Travel and entertainment
• Healthcare and insurance
• Charitable donations
• Home repairs and maintenance
• Large expenses that don’t occur every month

Many people have a good idea of what they spend monthly but overlook bills that arrive once or twice a year.

Don’t Forget Your Annual Expenses

Suppose you spend approximately $10,000 per month. That comes to $120,000 annually. But you also have a $15,000 insurance bill that you pay once a year. Your actual annual spending is now $135,000. That additional $15,000 adds up to $375,000 over 25 years, even before accounting for inflation or expense changes. It’s a substantial difference, especially when you’re planning for a retirement that could last several decades. A lot of people underestimate this number because they think in monthly terms and forget the annual hit.

Review your bank statements, credit card bills, insurance payments, and other expenses to get a more complete picture of what your lifestyle costs. You don’t need to predict every expense perfectly. You do need a realistic estimate that includes the bills you might otherwise forget. Once you know your annual spending, you can compare it with the income you’ll have coming in during retirement.

2. Determine Your Reliable Retirement Income

This is the income you can reasonably expect to receive throughout retirement without depending on investment market performance. These sources can help cover your living expenses before you need to withdraw money from your investment portfolio.

Your income floor may include:

• Social Security benefits
• Pension payments
• Consistent rental income
• Payments from an annuity you already own

Social Security Benefits

Social Security can provide an important foundation for retirement income, especially for married couples. When you begin claiming benefits affects how much you receive each month. Timing can also affect the benefits available to your spouse if you pass away first. For couples, coordinating Social Security claiming decisions can affect their combined retirement income. Rather than choosing a claiming age in isolation, consider how your Social Security benefits fit with your other income sources and long-term spending needs.

Pension Income

If you have a pension, review your payment options before deciding. Depending on your plan, you may be able to choose between single-life payments, joint-and-survivor benefits, or a lump-sum payout. You may also have different start dates for receiving payments. Each option can affect how much income you receive and what happens to those payments after your death. A higher monthly payment might look appealing, but consider how that choice could affect your spouse’s future income.

Rental Income and Existing Annuities

Rental income may also contribute to your retirement income floor if it’s stable and likely to continue. Before including it, consider whether the income has been consistent, whether you expect it to continue, and whether you’re comfortable managing the property during retirement. If you already own an annuity, include any reliable payments it provides in your calculations. You don’t necessarily need to purchase a new annuity. The goal is to understand your current income sources and how they support your retirement spending.

That’s $7,800 per month, or $93,600 annually. For a household spending $120,000 per year, this income covers most of its expenses. Instead of replacing an entire paycheck through investments, the household only needs its portfolio to cover the remaining difference.

SEE ALSO: Retirement Planning Checklist: 8 Financial Moves to Make

3. Calculate Your Portfolio Withdrawal Rate

Your portfolio withdrawal rate measures how much you need to withdraw each year to cover your expenses. You may have heard of the 4% rule, often used as a starting point for retirement withdrawals. However, your actual withdrawal needs depend on the gap between your annual spending and your reliable retirement income. Start by subtracting your income floor from your expected annual expenses.

In this example, the household needs to withdraw $27,000 from its $1 million portfolio each year. That’s a 2.7% withdrawal rate, well below the 4% figure often discussed in retirement planning. The figures use rounded annual income. A lower withdrawal rate may give your investments more room to handle market downturns and changing expenses, although it doesn’t guarantee your savings will last. Investment performance, inflation, taxes, and the length of your retirement can all affect the outcome.

How These Three Numbers Affect Your Retirement Strategy

Once you understand your annual spending, reliable income, and withdrawal rate, you can make more informed investment decisions. Some people assume they need an aggressive investment portfolio to afford retirement. They worry that if their savings aren’t growing quickly enough, they’ll eventually run out of money. But if your reliable income covers most of your expenses and your withdrawal rate is relatively low, you may not need to take as much investment risk. Think of the difference between a rocket ship and a hot air balloon.

A rocket ship aims for rapid growth, while a hot air balloon moves at a slower, steadier pace. Your investments don’t necessarily need to deliver the highest possible returns if a more moderate approach can support your income needs. Your portfolio should reflect how much income you need, how long your savings may need to last, and how comfortable you are with market fluctuations.

SEE ALSO: 6 BIG Retirement Mistakes (And How To AVOID Them)

How Much Money Do You Need to Retire Comfortably?

No single retirement savings number works for everyone. A $1 million portfolio may provide enough income for one household but fall short for another. Your spending habits, Social Security benefits, pension income, and withdrawal needs all influence the answer.

Before deciding whether you’ve saved enough, review these three numbers:

1. Annual retirement spending: How much will your lifestyle cost each year?
2. Reliable income floor: How much income can you expect without depending on the stock market?
3. Portfolio withdrawal rate: What percentage of your savings will you need to withdraw annually?

Together, these numbers can help you understand how your retirement income and investments fit together. At Paces Ferry Wealth Advisors, retirement planning includes reviewing your income sources, investment strategy, and expected expenses to help you prepare for the years ahead. Contact us to discuss your retirement plans and how your savings could support your future income needs.

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.