A recent survey by Northwestern Mutual revealed that the average American believes they need about $1.46 million to retire comfortably. This figure has risen by $200,000 compared to last year's survey and is nearly $500,000 higher than in 2020. However, the reality is that most Americans have saved less than $100,000 for retirement, which can make this goal feel out of reach.
In this post, we’ll explore what a $1.5 million retirement looks like in terms of spending capacity and analyze two additional scenarios for those planning to retire on significantly less. Here the YouTube version of this blog post if you prefer to watch instead of read:
Whether or not you need $1.5 million to retire depends on several factors:
We’ll use financial planning software, Income Lab, to assess spending capacity using a "guardrail" spending strategy.
What is a guardrail spending strategy? It’s a dynamic approach to retirement spending, which adjusts based on the performance of your portfolio. Unlike traditional retirement rules, this strategy allows for flexibility — spending more when the market is up and cutting back when it’s down. The goal is to maximize your spending over your lifetime without the risk of outliving your savings.
Now, let’s take a look at three case studies that demonstrate what retirement could look like at different savings levels.
Meet John and Jane – both are 65 years old and retiring this year with $1.46 million, the amount the average American believes is necessary for a comfortable retirement.
Using the guardrail strategy, John and Jane’s initial spending capacity is $10,471 per month, or about $120,000 per year. If their portfolio performs well and hits the upper guardrail, they could increase their spending to enjoy more in their golden years. Conversely, if the market drops significantly, they would temporarily reduce spending by around $500 per month until the portfolio recovers.
Key takeaway: With $1.46 million, John and Jane can comfortably withdraw about $10,000 per month, thanks to a combination of their investments and Social Security.
For a more realistic scenario, John and Jane at age 67 plan to retire with $730,000 — half the amount of the first case.
Despite retiring with less, John and Jane can still spend around $6,000 per month, or $72,000 annually, with potential increases if their portfolio hits the upper guardrail. If they are flexible with their spending, they could raise their monthly withdrawals to $6,300. However, this would bring their lower guardrail closer, meaning a smaller market drop would trigger a spending cut.
Key takeaway: Even with $730,000 in retirement savings, John and Jane can comfortably spend over $6,200 per month, combining portfolio withdrawals with Social Security benefits.
For our final example, let’s look at Jane, age 62, a single retiree who hopes to retire early with just $500,000.
Using the guardrail strategy, Jane can spend about $3,500 per month in retirement. Since her home is paid off, her spending will focus mostly on discretionary expenses. Even if the market drops, she would only need to cut her spending temporarily and could still manage comfortably.
If Jane is worried about potential market downturns, she can stress-test her plan by simulating scenarios like the 2008 financial crisis. In that case, her income would temporarily decrease, but she would be able to increase it again once the market recovered.
Key takeaway: Jane can retire at age 62 with $500,000 and comfortably spend around $3,500 per month, thanks to a combination of her savings and Social Security.
As we’ve seen in these three case studies, the amount needed to retire can vary significantly depending on your situation. While $1.46 million may be the average figure Americans believe they need, many people can retire comfortably with much less by using dynamic strategies like the guardrail approach in conjunction with other sources of income like social security benefits.
It’s essential to remember that the spending capacities outlined above are before taxes. We didn’t explore strategies like Roth conversions or tax-efficient withdrawal sequences, both of which could impact your actual income in retirement.
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