If you have a million-dollar 401(k) at age 60, congratulations! You’re in an exclusive club. But the question of whether a million-dollar nest egg is enough for you to comfortably retire is more complicated than it may seem.
Let’s take a quick look at what a $1 million 401(k) means to you in retirement, how it fits into your overall financial health, and other factors you need to consider.
Is $1 million enough? That’s the wrong question
One important point to know if you’re getting close to retirement age is that it isn’t just about how much money you have in savings. It’s about how much income you can sustainably create after leaving the workforce.
Think about it this way: If someone has just $100,000 in retirement savings but has a $5,000 monthly pension, they could be in significantly better shape than someone with $500,000 in retirement savings and no pension.
A popular rule of thumb among retirement planners is that you should expect to need about 80% of your pre-retirement income to sustain the same lifestyle after retirement. So, if you have a salary of $100,000, you should expect to need $80,000 a year after you retire.
Of course, that’s just a guideline, and your actual income needs could be higher or lower depending on several variables. For example, if you pay off your mortgage before you retire, your income requirement could be lower.
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How much income will you have?
Many financial planners use the 4% rule of retirement. It’s admittedly an imperfect guideline, but it’s a good starting point for assessing where you stand.
In a nutshell, this says that you can safely withdraw 4% of your retirement savings every year, and adjust your withdrawals for inflation in subsequent years, with little worry of running out of money. Based on this rule, it’s reasonable to expect $40,000 in sustainable annual income from a $1 million 401(k).
The good news is that this won’t be your only source of income in retirement. At the very least, you’ll need to consider how much you’ll get from Social Security (which you can’t start collecting until at least age 62). If you have a pension or annuity, be sure to consider that as well.
If you’re planning to retire at age 60, there are some early retirement considerations as well. As I just mentioned, you can’t claim Social Security until at least 62. And if you’re 60 today, your full Social Security retirement age is 67. You also can’t get Medicare until 65, so unless your job allows you to take your health plan with you (not very common), you’ll need to plan for the cost of health insurance in the meantime.
The bottom line
As you can see, although the question of “Is $1 million enough?” is a very common one among pre-retirees, there isn’t an easy answer. It depends on your desired retirement age, your other sources of income, and several other factors.
However, it’s fair to say that for the average American, achieving a seven-figure retirement account balance at 60 is quite an accomplishment and puts you in a significantly better financial position than the average household.
