I Always Thought I Needed $1 Million to Retire. Here Is Why That Number Matters Less Than I Thought

For the earliest years of my adulthood, my big life goal was to make $1 million as soon as I could and retire shortly thereafter. The seven-figure sum was admittedly arbitrary. But it was a nice round number, and certainly enough to support the modest lifestyle I was seeking in retirement.

Much has changed in the meantime, though. That number doesn't mean nearly as much as it used to, for a handful of reasons. Here are four reasons why I've since changed my ultimate financial goal.

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1. Inflation has eaten away at the buying power of $1 million

I knew inflation would gradually chip away at my targeted nest egg's buying power. But thanks to periods of unusually large price increases, inflation has taken more of a toll than I originally expected. Based on data from the Bureau of Labor Statistics, $1 million in 1996 dollars would be worth just a little less than $2.2 million today.

I'm not saying $2.2 million is my new retirement savings target; a million bucks is still a solid amount of money even after 30 years of inflation, after all. I am saying that a million dollars clearly isn't what it used to be.

2. Longevity means the money needs to last longer

Even taking inflation's impact out of the equation, I still realize that the $1 million I thought would be plenty back then won't be enough now for an often-underappreciated reason. That's longevity. Thanks to better healthcare, people are simply living longer than they used to, which means we'll all be counting on our retirement portfolios to generate more retirement income than we initially expected.

The Centers for Disease Control (CDC) has the numbers. Back in 1996, the average life expectancy in the United States was 76.1 years. Now, it's a record-breaking 79.0 years. The average retirement age, however, hasn't changed quite as much in the meantime. The Bureau of Labor Statistics says it was just a tad over 62 years old back then, and isn't a whole lot higher than that today. That means the number of years my retirement savings must produce income is at least one to two more, on average, than it was then.

It's admittedly a small numerical difference. If you've ever run a savings-depletion model, you can't have helped but notice your nest egg's depletion really starts to accelerate toward the end of the projection. That's because there's less money in it to contribute to its net growth, while more and more money is coming out of it.

Of course, while the average lifespan hasn't exactly soared since 1996, it's certainly less unusual for people to live well into their 90s now. It may be statistically unlikely, but I don't want to become a broke statistical anomaly.

3. Income matters more than amount

While the amount matters -- since the size of your nest egg and its ability to generate retirement income are correlated -- I now recognize that maybe I've been looking at the matter from the wrong perspective. Simply saving a specific amount of money doesn't necessarily guarantee the amount of income I'd like to collect once retired. Oh, the two are still far too connected to simply ignore the relationship. It's just that there's also a potential disconnect.

And there are two specific strategies I've got in mind to address this risk.

The first of them is the so-called "bucket" strategy, where I separate my savings into different accounts, or buckets, each with a different goal or purpose. For instance, my short-term bucket will assure me I've got enough cash to last a couple of years. The intermediate-term bucket will ensure I'm generating enough near-term income to fill and refill my short-term bucket as needed. My long-term bucket, while likely to be small, will hold growth investments. As time marches on, I'll be moving money from longer-term buckets to shorter-term ones, although all three can and should make some forward progress along the way.

You can accomplish the same without using separate accounts as buckets. However, separating your savings helps you stay focused on what each grouping is supposed to accomplish, preventing you from suffering what's called "mission drift," which ultimately undermines your success.

I don't have my buckets established just yet. I suspect I'll start divvying up my savings like this three to five years away from retirement.

As for the second strategy, it's simpler, and I'm already doing it. I'm buying dividend stocks with seemingly low yields but strong dividend growth rates, so when I do retire, the effective yield on my initial investment will be significant. You don't even have to collect these dividends as cash right now. You can just reinvest these payments into more shares of the ticker that pays them. I'm simply trying to maximize my future cash flow, but to do so, I have to establish these positions now and let their dividends grow.

4. Interest rates (on average) are lower now

Finally (and as an extension of the discussion of growing dividend payments), 30 years ago, the federal fund rate was regularly at or above 5%, pushing interest rates on most bonds above that level, and even dragging the S&P 500's trailing dividend yield up to 3% (or better). Today, the federal funds rate is consistently below 5% -- and sometimes much lower -- keeping interest rates on bonds alarmingly low and undermining the market's typical dividend yield. Indeed, the S&P 500's dividend yield has been below 2% for the better part of the past couple of decades.

The point is, the amount of dividend and interest income that $1 million could have generated back then is probably about one-third less now.

In theory, I could offset this missing income with capital gains, which have obviously been phenomenal of late. I don't want to rely on that approach, though, since I can't control or count on the market's ebbs and flows. I just need more investable dollars to generate the same amount of reliable retirement income I was hoping to collect back in 1996.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.