What Kind of Retirement Can a $1 Million Nest Egg Buy You?

A lot of people set the goal of saving $1 million for retirement because it's a nice round number. But before you get your mind set on aiming for a $1 million nest egg, you may want to think about whether that'll really be enough money for you -- or whether it's more than what you need to save.

What annual income will a $1 million nest egg provide you with?

If you're retiring with $1 million in retirement savings, you're obviously not going to be spending all of that money at once -- or at least you shouldn't be. Rather, you'll want to come up with a withdrawal rate that allows your savings to last throughout retirement.

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If you use the popular 4% rule, a $1 million nest egg gives you about $40,000 in annual income to start with. You're then supposed to adjust future withdrawals for inflation.

However, a 4% withdrawal rate may be too aggressive for your savings if your IRA or 401(k) is invested conservatively. In that case, a 3% withdrawal rate may be more appropriate, which would give you $30,000 a year as a baseline.

On the flipside, if your portfolio is loaded with stocks and you decide you're comfortable with a 5% withdrawal rate, that's $50,000 of annual income.

Look at the big picture

You're obviously free to use whatever withdrawal rate you choose for your retirement nest egg. But a 3% to 5% range generally conforms to what many financial experts would suggest. This means that if you have $1 million saved, you can expect $30,000 to $50,000 a year.

That may not be your only source of income, though. For many retirees, Social Security provides a monthly benefit. And with the average retiree today collecting $2,071 from Social Security, that alone could amount to roughly $25,000 per year.

You may also have other income at your disposal, like earnings from a part-time job. It's important to factor in all of your income streams when setting a retirement savings goals.

Should you aim for $1 million in retirement savings?

Not necessarily. For some people, that may be the perfect amount. But if you plan to live frugally and don't anticipate large expenses, you may be fine retiring on less.

On the other hand, if you have lofty goals for your senior years, a $1 million nest egg may not cut it -- even if you're able to withdraw on the higher side and get $50,000 a year out of your savings.

Your best bet, therefore, is to figure out what you want retirement to look like and what spending needs you think you'll have. From there, you can try to come up with a retirement savings target that's right for you.

And that sum may end up being $1 million. But it's important to calculate that number based on your personal situation rather than just say, "Hey, I think a $1 million nest egg works."

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