It’s the million-dollar question. Is $1 million enough to retire? 

Many of us grow up thinking of $1 million as an astronomical amount of money. It’s not until you reach adulthood that you realize that not only is $1 million in savings possible for you, but it may also be necessary.

One of the most common questions people ask about retirement is whether $1 million is enough. Many people consider it a benchmark for a comfortable retirement, but it’s not necessarily enough for everyone. In fact, as the cost of living rises, many retirees will need far more than $1 million to live out their golden years comfortably.

There are plenty of factors that go into how much you’ll need during retirement, including your household size, financial responsibilities, desired lifestyle, the impact of inflation, and more. 

Ultimately, there’s no one-size-fits-all approach to retirement savings, nor is there a universal retirement savings target. It’s important to focus on your own financial situation and needs rather than fixating on an arbitrary goal like retiring with $1 million.

Factors to consider: How long will $1 million last in retirement?

How much you save for your future depends on several personal finance factors and your goals, including these key ones:

Your desired retirement lifestyle

Your desired retirement lifestyle is one of the most important factors in determining how much you’ll need to have saved.

Do you have a picture in your mind of what retirement will look like for you? For example, maybe you plan to travel extensively, dine at the best restaurants, spend time with your children and grandchildren (and spoil those grandkids), tour the country in a motorhome, buy a yacht or sailboat, or join a country club. If so, you may need a lot of money to support this kind of lifestyle.

On the other hand, if you envision a more frugal retirement lifestyle or are one of the lucky few who has a robust retirement pension, you might have plenty of money in the bank to retire on, and maybe even leave a generous inheritance for your heirs.

Before getting too close to retirement, it’s important to run some preliminary numbers to get an idea of how much you might need during retirement. A general rule of thumb is that retirees typically require about 80% of their pre-retirement income to sustain their lifestyle.

For example, if you earn $100,000 before you retire, you can expect to need about $80,000 during retirement. This decrease in expenses is a result of no longer needing to factor in retirement contributions, often paying lower taxes, and having lower daily expenses when you’re not leaving the house for work each day.

Some other considerations that may impact your personal expenses during retirement include your housing costs (if you’re a renter, you can expect rent increases each year), your medical needs, and whether you have any dependents to support.

As you’re planning your retirement finances, it’s also important to set aside sufficient cash reserves for unexpected expenses such as home repairs or vehicle maintenance. Having emergency savings on hand will help you avoid having to pull extra funds from your retirement accounts, possibly leaving you with less than you need to retire.

Read more: Over 1 in 5 Americans have no emergency savings

Your risk tolerance and rate of return

When entering retirement, many people adjust their asset allocation to a less risky mix of stocks, bonds, and cash alternatives. While reducing volatility, this generally comes with an expectation of lower rates of return throughout retirement.

Finding the right balance between risk and return could potentially stretch your retirement nest egg significantly further if that money was invested more aggressively throughout retirement. But this could also subject your retirement funds to a higher risk of loss, which might jeopardize your retirement financial security.

Managing the risk-reward tradeoff is something that each individual and couple must seriously consider. It might be smart to discuss this with a financial professional.

Your health and life expectancy

Healthcare expenses can eat up a big chunk of your retirement nest egg, depending on the type of healthcare coverage you have and what health issues you encounter during your retirement.

In fact, according to a 2021 study, a healthy 65-year-old couple could see their annual healthcare costs go up by nearly 6% per year in retirement because of inflation.¹ But with inflation reaching such high levels in the past several years, that percentage could be even higher.

While Medicare will partially cover many healthcare expenses, there will still be copays and other out-of-pocket medical expenses you’re responsible for. If you are in poor health or experience major medical complications after you retire, this could drain your nest egg faster than you may have planned.

Further, if your family has a history of longevity, you might live longer than average. If you end up outliving the average lifespan, you might need a healthy chunk of change to last throughout retirement. On average, a 65-year-old man today can expect to live until 82, while a 65-year-old woman can expect to live until nearly 85, according to the Social Security Administration.² The longer you live, the higher you can expect your healthcare costs to be.

Where you live in retirement

It’s important to evaluate the overall cost of living in any given state, in addition to your state’s tax rates. Some retirees choose to relocate in retirement to reduce their overall expenses, either by moving to an area with a lower cost of living or more retirement-friendly tax laws. However, relocation brings along its own set of expenses, including increased travel costs and long-term care costs if you move away from loved ones.

Read more: States that don't tax retirement income

How much income you receive in retirement

The amount of income you expect to receive during retirement significantly impacts the amount you’ll need when you retire.

The first thing to consider is the amount of retirement income you can withdraw each year from your savings. The 4% rule is commonly used in finance to determine how much you can withdraw from your portfolio each year. It advises that you can withdraw up to 4% of your portfolio each year and have a low likelihood of outliving your savings during a 30-year retirement.

For example, if you have retirement savings of $1 million, the 4% rule says that you can safely withdraw $40,000 per year during the first year — increasing this number for inflation each subsequent year — without running out of money within the next 30 years.

Of course, the 4% rule isn’t perfect. It doesn’t account for different portfolio compositions. It also doesn’t take into account taxes or fees. The 4% rule also assumes a retirement of 30 years. Plenty of retirees will live longer than that, so the 4% rule may not be accurate. Finally, the 4% rule is based on historical returns and inflation rates. Historical returns are no guarantee of future results, meaning there could certainly be periods where the 4% rule doesn’t work.

It’s important to start considering how you’ll generate income during retirement long before you’re actually there. When building your retirement portfolio, diversifying to create stability is crucial. Incorporating a mix of investment options is crucial for stability and growth.

You may also consider the income potential of various investments. For example, the U.S. stock market has a historical average annual return of 10%.³ Meanwhile, bonds may have a lower average return, but also a lower risk profile. Meanwhile, annuities often have a lower return, but unlike other investments, it’s a guaranteed return.

Ultimately, it’s important to weigh risk and reward in your portfolio. There’s generally a direct correlation between the two — the higher your risk, the higher your potential reward, and vice versa. Some retirees may feel comfortable taking on a bit of extra risk for a higher reward, while others would rather play it safe and preserve their savings.

Finally, it’s important to consider sequence risk when building your retirement portfolio. Sequence risk refers to the risk of a market downturn in your later working years or early retirement years. Such a downturn could have a major impact on your retirement savings for the rest of your life.

For that reason, as you near retirement, it’s important to have some of your savings in very low-risk investments or savings to help weather a market downturn without having to sell assets at a loss. The better you can weather this storm without selling assets at a loss, the more retirement income you’ll have in later years.

Additionally, for many people, their retirement savings isn’t the only source of income. And the more income you have coming from other sources, the less you’ll need to save. Other income sources could include:

• Social Security income: Assuming you or your spouse meets the work requirements, you can expect to receive Social Security income during retirement. The amount you’ll receive is based on your income during your working years. You can use the Social Security website tools at any time to determine how much you’re eligible for. Keep in mind that the longer you wait to collect Social Security benefits, the more you’ll receive each month.
• Part-time job: Many retirees choose to work part-time during retirement to generate additional income. For many retirees, this part-time work can also increase their quality of life, helping them stay active and social. Keep in mind that if an injury or illness takes you out of the workforce, you’ll want to have money saved to compensate.
• Pension income: Pension plans aren’t as common as they once were. However, if you were lucky enough to work for a company or organization that offers one, you can factor that income into your retirement plan.

The impact of inflation

Inflation erodes the purchasing power of your retirement savings because it costs more money to buy the things you need — everything from food and groceries to gasoline, clothing, and entertainment. After years of low inflation, the U.S. economy has recently experienced an inflation spike. If this continues for a long period of time, it could jeopardize what your nest egg will enable you to purchase.

Read more: How to protect against inflation

How to increase your savings

It’s important to take advantage of your working years to save as much as you can for retirement. If you’re not currently on track to reach your retirement goals, there are a few steps you can take to increase your savings and get you back on track.

Aim to save 10% (or more) of your annual pretax income for retirement

Experts generally recommend saving at least 10% (but ideally more) of your gross income for retirement. This figure is based on a 40-45-year working career during which you actively save for retirement.

If you participate in an employer-sponsored retirement plan at work, such as a 401(k) or 403(b) plan, and your employer matches your contributions, this could reduce the amount you need to save.

For example, if your employer matches your 401(k) contributions up to 5% of your salary, you would only need to personally save 5% to achieve the benchmark of 10% invested. That being said, it’s important to look into your employer’s vesting rules to determine the requirements to actually get all of that money.

Of course, you may also decide to save the full 10% yourself and consider the 5% from your employer a bonus. This approach would ensure a larger nest egg for retirement.

Leave your retirement savings alone

One of the biggest hindrances to building your retirement savings is withdrawing money from your retirement account before you retire. Not only might you incur early withdrawal penalties, but you’ll miss out on potential long-term compounding of returns on your savings. Compounding is one of the biggest friends you may have when it comes to accumulating a retirement nest egg.

This doesn’t just apply to early withdrawals. An unpaid 401(k) loan will also reduce the amount you have in your retirement savings when you leave the workforce, even if it seems like a less harmless option. After all, until you repay the balance, that money isn’t growing and compounding in your account.

Consider using financial tools

Are you prepared for retirement? What lifestyle can you afford to maintain? Will moving out of state significantly alter your retirement potential? Find out for yourself if your retirement plan is on track. Empower’s financial tools can help you determine how much money you might need to fund your golden years.

The Empower Retirement Planner allows you to determine how much money you may need to save for retirement. You can also evaluate alternative plans in order to determine whether $1 million might be enough for you. These financial tools can help you gain insights into your retirement potential and adjust your savings strategy accordingly.