Americans Think They Need $1.26 Million to Retire. Are They Right?

Key Points

• Americans responding to a recent survey estimate they'll need $1.26 million to retire.

• This amount may be correct for some but not all retirees.

• The $23,760 Social Security bonus most retirees completely overlook ›

What's the magic number to achieve retirement security?

According to a recent Northwestern Mutual study, it's $1.26 million. That's the amount the surveyed Americans told Northwestern Mutual they think they will need to have saved in order to support themselves after leaving the workforce.

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The big question is: Are they right?

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Is $1.26 million a good amount of retirement savings?

With these Americans projecting that they'll need $1.26 million saved to have a secure retirement, it's worth looking at just how much income this amount of money would provide as a senior. That's going to depend on your withdrawal rate, or the amount you take from your retirement plans, as well as how much remains in them.

Obviously, you can't just raid your 401(k) and take an unlimited amount of money out. You need to keep enough invested that you continue to earn returns and your money lasts for the whole of your retirement. So, you have to try to figure out on a safe withdrawal rate.

Experts traditionally recommended the 4% rule. This rule says you can withdraw 4% in year one and adjust up each year due to inflation. While there are some questions about whether this rule holds true today, let's assume it does for simplicity to figure out how much income $1.26 million would produce.

When following the 4% rule, you'd end up with $50,400 from your retirement accounts in the first year. When you combine this with your Social Security benefit -- which will be based on your own personal circumstances -- that may very well give you a good amount to live on.

Of course, depending on your other income and your spending plans, this amount may be more or less than you need.

Here's how you can decide how much to save for retirement

While $1.26 million might seem like a reasonable nest egg, whether that's enough for you is going to depend on your other income and your budget as a retiree. You'll also need to take into account the effects of inflation.

After all, while $50,400 per year might seem like a lot of money today, it may not be in 30 years, after the effects of inflation take hold and there are decades of price increases that affect your cost of living.

Ultimately, the best way to make sure that you have enough money for your retirement is to do your own individual calculations based on your income and spending needs.

You can figure out what your final salary is going to be at your chosen retirement age by assuming you'll get a 2% raise each year until that time -- then multiply that number by 10 to get a good idea of how big your nest egg should be.

Doing this math can help give you a more accurate picture of what financial goal you should set for yourself as part of your retirement planning process. That way, you can make sure you don't find yourself falling short of being able to live the life you desire as a retiree.

The $23,760 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income.

One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these strategies.

View the "Social Security secrets" »

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