Do you really need a million dollar retirement nest egg by the time you retire? Keep reading so we can discuss this myth here!
In this article:
- Estimate How Many Years You Expect to Live in Retirement
- Calculate Your Anticipated Annual Spending
- Add up Any Sources of Guaranteed Income
Breaking Down the Million Dollar Nest Egg Myth
Growing Your Retirement Nest Egg to a Million Dollars
Is there a retirement nest egg calculator for you to determine how much you should save for later years?
What is a retirement nest egg? This is a substantial amount in the form of cash or assets saved up specifically for retirement.
A lot of my clients are under the impression they need a “million dollar nest egg” before they retire.
But they’re surprised when I actually break down the math for them.
If your retirement savings goal is $1 million, and you plan on retiring in 40 years, that means your retirement fund needs to grow by $25,000 a year to hit that number. A regular person’s average nest egg doesn’t grow that much annually.
If you’re like a lot of my clients, your jaw just dropped.
But the good news is that what I just explained is actually the opposite of how you should really be calculating your retirement income.
Getting to the correct figure isn’t as complicated as you might think. You don’t need to panic if your current savings seem to be way behind in giving you the best nest egg for retirement.
In fact, I’ve developed a simple 3-step guide to figuring out what your “magic number” is.
And I even have solutions at each step along the way if you’re afraid of falling short.
Now, what steps should you take to crack that million dollar nest egg myth wide open?
Step #1: Estimate How Many Years You Expect to Live in Retirement
The first step to determine how big your retirement nest egg size should be is to figure out how long you’re going to use it for.
It’s smart to have an idea of what age you plan to retire at. But you also need to take into account how many years you expect to live past your retirement age.
This way, you will be able to determine an estimate of how long your retirement nest egg will last.
Today, the average healthy male retiree has an average life expectancy of 78, and the average female retiree has a life expectancy of 81.
Generally speaking, the more years you live after retirement, the more you’ll need in savings.
I suggest you take a good look at family medical history and consult your doctor about your health to better understand how many years you can reasonably expect to live after retirement.
Knowing your family’s medical framework also helps in planning out how much your nest egg for retirement should be. Though Medicare or other medical insurances will cover most of your medical expenses, it still helps to be prepared emotionally and financially.
Once you’ve got an idea of how many retirement years you can expect, you’ll have a better understanding of just how much you’ll need to live comfortably.
Are you worried that your savings don’t stack up?
If so, don’t worry.
You don’t have complete control over how many years you’ll live after retirement, but there’s a strategy you can use to offset any lack in savings.
Solution: Delay Retirement
The later you stop working, the less you’ll need to rely on savings and Social Security during retirement.
Even if it’s just by a few years, putting off retirement could add thousands to your savings.
And by delaying filing for Social Security, you could also receive an increased monthly benefit.
Step #2: Calculate Your Anticipated Annual Spending
There is no “magic number” for what you should have in retirement savings.
That’s because everyone’s retirement spendings will look completely different.
Do you plan on regularly eating at high-end restaurants, traveling around the world, or taking up an expensive hobby? If so, you need to make sure your savings can support these activities.
There are plenty of other activities to consider as well, many of which won’t involve breaking the bank.
Regardless of what you plan on doing to live a fulfilling retirement, you need to calculate your annual anticipated spending so you can save accordingly.
I suggest coming up with a list of all of your living, leisure, and miscellaneous expenses for a year.
This figure will get you a realistic expectation for your retirement spending which you can use to start planning your savings.
If your yearly spending is more than you expected, you’re not out of luck.
Solution: Create Extra Revenue
Sure, you can make an effort to cut back on spending. I think just about everyone could benefit from that.
But you don’t want to do so at the cost of living a happy retirement.
That’s why creating extra income is my go-to solution to bridge the gap between your spending and savings.
You may be completely stepping down from regular work but you can still earn additional income after retirement. And some extra income can definitely add to nest egg financial needs.
If you’re downsizing, you might consider an estate sale.
If you plan on spending your free time taking up a craft — like knitting, painting, or gardening to name a few — you can monetize some of these activities you’re planning on enjoying anyways.
And if you’re still able to work, try considering the “step down” retirement strategy I’ve talked so much about recently — where you work usually two days a week to “ease” your way into your new lifestyle while still collecting a paycheck.
With this arrangement, you can still earn money and save up for the nest egg you’ll be needing in a few more years.
You can also have more time to ease into retirement by giving yourself more time to explore hobbies or interests you can have when you stop working completely.
Step #3: Add up Any Sources of Guaranteed Income
So far we’ve covered your estimated life expectancy as a retiree and how much you’ll need to live each year.
The last step to consider is what your income sources will be.
Everyone’s list will be different, but for starters be sure to include your Social Security benefit, your 401(k)s, Roth IRAs, bank accounts, life insurance policies, side-gig income, rental property income, and annuity payments.
Add these up, and then compare it to the figure you came up with for your annual spending.
The gap between the two figures is where your lifetime savings will come in.
If you’ve done all you can to save enough and the gap is still too wide, there’s one last course of action you can take.
Solution: Sit Down With a Personal Financial Advisor
There are a variety of different investment strategies and Social Security claiming decisions you can make if you’ve saved all you can and it still isn’t enough.
And a professional advisor can help you find a strategy that could help increase your guaranteed income.
It’s time to start thinking more realistically about the actual amount that you’ll need to afford your retirement.
After following each of these steps, you may find that it’s not as much as you would’ve thought. Saving up for a financial nest egg doesn’t have to stress you out.
But if you’re more nervous about affording a comfortable retirement lifestyle after these steps, there are plenty of strategies to get you back on track.
So keep an eye on this blog as I continue to send out these strategies for living a Rich Retirement.
What have you done to add more to your retirement nest egg? Share your strategies in the comments section below!