According to estimates based on the Federal Reserve Survey of Consumer Finances, a mere 3.2% of retirees have over $1 million in their retirement accounts. The number of those with $2 million or more is even smaller, falling somewhere between this 3.2% and the 0.1% who have $5 million or more saved.
A switch to the 6% rule could provide much-needed financial relief. For example, for a new retiree with savings of $500,000, withdrawing 6% instead of 4% would provide an extra $10,000. Unfortunately, the reality is that such a high withdrawal rate significantly increases the chances of your account running dry.
Retirees in a more comfortable position should be able withdraw 5.5% in the first year, he estimates, and then withdraw at a higher rate in subsequent years. People with a lower life expectancy or those who retire later in life would have a shorter projected retirement period and can start withdrawing at a higher rate.
The 25x Retirement Rule is a guideline that suggests you should aim to save 25 times your annual expenses before retiring. This rule is based on the assumption that a well-invested retirement portfolio can sustainably provide 4% of its value each year to cover living expenses, also known as the "4% Rule."
If you use the classic 4% rule to manage your retirement savings, with a $500,000 balance, you're looking at about $20,000 per year in income. But that's probably not your only income source available. Chances are, you're eligible for Social Security at the very least.
The $1,000 per month rule is designed to help you estimate the amount of savings required to generate a steady monthly income during retirement. According to this rule, for every $240,000 you save, you can withdraw $1,000 per month if you stick to a 5% annual withdrawal rate.
For example, if you have retirement savings of $1 million, the 4% rule says that you can safely withdraw $40,000 per year during the first year — increasing this number for inflation each subsequent year — without running out of money within the next 30 years.
What is the 7 Percent Rule? In contrast to the more conservative 4% rule, the 7 percent rule suggests retirees can withdraw 7% of their total retirement corpus in the first year of retirement, with subsequent annual adjustments for inflation.
The Rarity of $5 Million Retirements
According to data from the Employee Benefit Research Institute, based on the Federal Reserve's Survey of Consumer Finances, a mere 0.1% of retirees have managed to accumulate over $5 million in their retirement accounts.
Rule of thumb: "Save 10% to 15% of your income for retirement." The detail most people miss here is that a 10% to 15% savings rate—which includes any match from your employer—makes sense only if you start saving in your mid-20s or early 30s.
Just 16% of retirees say they have more than $1 million saved, including all personal savings and assets, according to the recent CNBC Your Money retirement survey conducted with SurveyMonkey. In fact, among those currently saving for retirement, 57% say the amount they're hoping to save is less than $1 million.
I estimate that you'd be offered $470,000 for a $3,000 monthly pension that is about to start at age 65. (I can only estimate because plans vary in how quickly they adopt interest rate updates.) If you are a 65-year-old nonsmoking female, the pension is worth more like $626,000.
Rich retirees: In the 90th percentile, with net worth starting at $1.9 million, this group has much more financial freedom and is able to afford luxuries and legacy planning.
Probably 1 in every 20 families have a net worth exceeding $3 Million, but most people's net worth is their homes, cars, boats, and only 10% is in savings, so you would typically have to have a net worth of $30 million, which is 1 in every 1000 families.
Your net worth is what you own minus what you owe. It's the total value of all your assets—including your house, cars, investments and cash—minus your liabilities (things like credit card debt, student loans, and what you still owe on your mortgage).
The ideal monthly retirement income for a couple differs for everyone. It depends on your personal preferences, past accomplishments, and retirement plans. Some valuable perspective can be found in the 2022 US Census Bureau's median income for couples 65 and over: $76,490 annually or about $6,374 monthly.
Reducing expenses: The 80/20 rule for investing can also help you identify the 20% of expenses that are responsible for 80% of your income – money that can be channeled into your retirement savings. By focusing on reducing these expenses, you can free up more money to save.
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.
What are the average and median retirement savings? The average retirement savings for all families is $333,940, according to the 2022 Survey of Consumer Finances. The median retirement savings for all families is $87,000.
Yes, it's possible to retire on $1 million today. In fact, with careful planning and a solid investment strategy, you could possibly live off the returns from a $1 million nest egg.
This is the same William Bengen who first articulated the so-called 4% rule, which states that a retiree with a portfolio of stocks and bonds can safely spend that percentage of his assets each year, after adjusting annually for inflation.
You can retire comfortably on $3,000 a month in retirement income by choosing to retire in a place with a cost of living that matches your financial resources. Housing cost is the key factor since it's both the largest component of retiree budgets and the household cost that varies most according to geography.
According to the $1,000 per month rule, retirees can receive $1,000 per month if they withdraw 5% annually for every $240,000 they have set aside. For example, if you aim to take out $2,000 per month, you'll need to set aside $480,000.