I’m a Financial Planning Expert: You’re Right About Your Retirement Savings If …

Finding the magic number for your retirement savings is no easy feat. According to a recent survey of over 1,000 Americans conducted by GOBankingRates, more than a third (35.48%) of the respondents felt they would need to have anywhere between $500,000 and $1.5 million in retirement savings.

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With the cost of living increasing and people living longer, you’re going to want to focus on saving more money to ensure that your nest egg can help you cover the bills. For a more in-depth look, GOBankingRates spoke with two retirement planning experts to see whether these numbers make sense .

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Why You Want To Save Between $500k and $1.5 Million

Both retirement experts agree that saving at least $500,000 for retirement is a smart goal.

“The belief that $500k to $1.5 million is necessary for retirement is often based on careful financial planning and realistic calculations of future expenses,” explained Tyler Meyer, a certified financial planner (CFP) and the founder of the educational platform, Retire to Abundance .

“These figures account for the diverse needs and lifestyles people anticipate in retirement, allowing for covering basic living expenses, healthcare costs, leisure activities and potential emergencies over a retirement period that could span 20-30 years.”

The 4% Rule

One key factor in creating a financial plan for your golden years is the 4% rule, also known as a common retirement planning guideline.

“According to this rule, withdrawing 4% of your retirement savings annually can provide a steady income stream while preserving your principal balance,” said Meyer. “For instance, with $1 million in retirement savings, you can expect to withdraw $40,000 annually.”

Meyer noted that you can cover your annual living expenses as a retiree by combining these funds with your Social Security benefits and other potential income streams. The good news is that having around a million dollars saved should bring in enough money to maintain your lifestyle.

Gloria Garcia Cisneros, a CFP and wealth manager with LourdMurray , added that knowing this rule means you can work backward. For example, if your annual income needed to cover your expenses is $80,000, then you would need two million dollars saved. Moreover, you can also calculate how much your combined income streams — Social Security, 401k, IRA, etc. — will earn you in total.

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The Perpetuity Formula

While the 4% rule is well known and highly recommended, there’s also another formula that can help determine how much to save for retirement. According to Garcia Cisneros, “This formula calculates what amount is needed right now to have an indefinite cash flow of $X amount based on a certain static growth rate.”

The formula is: lump sum needed = cash flow needed / growth rate .

Garcia Cisneros gave this example: “if you need $80,000 per year and you’re assuming a growth rate of 6% on your investments, then you would divide $80,0000 by .06% and get $1,300,000.”

Once again, you’ll want to take some time to tally up your expected retirement expenses and run some calculations to truly see how much money you’ll want to save.

Retirement Planning Considerations

As you develop your retirement financial plan, it’s essential to consider certain expenses and costs associated with leaving the workforce. Here are the retirement planning considerations that will confirm if your ideal savings amount will work.

Your Income Streams Are Critical

Garcia Cisneros pointed out that your savings will depend on your lifestyle and income streams. Someone with passive income streams could get away with saving up a bit less, while someone with debt will want to focus on building their nest egg.

“Some folks may have social security, pension, annuity, real estate or business income in retirement, which would reduce the amount of income their portfolio needs to provide them,” said Garcia Cisneros.

If you’re relying on limited income streams, you’ll want to aim to save up to $1.5 million in your retirement account to have enough money to last you.

Healthcare Costs

Healthcare costs, which tend to rise with age, are another critical consideration. Even though it’s challenging to determine how much you need to save for healthcare, you shouldn’t ignore this expense.

“Medicare helps, but it doesn’t cover everything,” explained Meyer. “Retirees often need supplemental insurance and must budget for out-of-pocket expenses, which can be substantial over time.”

You Can’t Forget About Inflation

Garcia Cisneros stressed that these formulas and numbers don’t accurately account for the cost of living going up over time with periods of soaring inflation.

As Meyer noted, “Inflation can erode purchasing power, making it essential to have a financial cushion to maintain a comfortable lifestyle.

Unexpected Expenses Could Occur

“People’s retirement savings estimates also reflect the need for flexibility and the ability to handle unexpected expenses, such as home repairs or family emergencies,” added Meyer.

It always makes sense to create a financial buffer for yourself so that you can be protected if you have to deal with any unexpected expenses. This means that even if $1.5 million seems excessive initially, you can never be too cautious.

You Have To Find Your Number

While one person could easily survive with a million dollars saved in the bank, another retiree may need much more due to their lavish lifestyle. Either way, you should work with a financial professional to help you figure out the numbers for your unique situation.

Final Thoughts

Garcia Cisneros advised, “Check in with yourself and your financial situation at least once a year to make sure you’re aware of your current standing. You can always correct if you need to reduce expenses or create income streams, but what we don’t want to happen is you run out of money later in life when it’s hard to go back to work or generate income.”

While the financial planning experts agreed that saving anywhere from $500,000 to $1.5 million for retirement makes sense, your specific numbers will depend on your personal situation. This range is just a starting point for your research.

“Aiming for $500k to $1.5 million in retirement savings is a reasonable target that accommodates living expenses, healthcare costs, inflation and the desire for a fulfilling retirement,” said Meyer. “It provides a balance between ensuring financial security and the freedom to enjoy life after decades of work.”

Methodology: GOBankingRates surveyed 1,037 Americans aged 18 and older from across the country between September 5 and September 7, 2023, asking fifteen different questions: (1) How much money do you currently have saved for retirement?; (2) How much money do you think you’ll need in retirement?; (3) How much do you spend or expect to spend monthly during your retirement?; (4) If you aren’t yet retired, how much do you expect to get from Social Security during your retirement?; (5) How much of your retirement do you plan to fund with Social Security?; (6) At what age did you or do you plan to claim Social Security benefits?; (7) Did you or do you think you will have to move to afford your retirement?; (8) Which of the following proposed Social Security solutions do you think would work best to prevent the trust fund from being depleted?; (9) What sources of income will you have in retirement? (Select all that apply); (10) How confident are you that you will have saved enough to afford retirement?; (11) If you retired early, at what age did you retire?; (12) Are you counting on help from your family (financial, housing, long-term care, etc.) to afford retirement?; (13) Do you think retiring around age 65 is financially possible for most Americans?; (14) What worries you financially about retirement? (Select all that apply); and (15) If you got a stimulus check in the last two years, how much of the money did you save for retirement? GOBankingRates used PureSpectrum’s survey platform to conduct the poll.

This article originally appeared on GOBankingRates.com : I’m a Financial Planning Expert: You’re Right About Your Retirement Savings If …