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Saving $1 million for retirement is a common goal, but it’s not necessary for everyone. Find out here if you should set your sights so high. [[{“value”:”

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It can be hard to figure out how much to save for retirement. One common approach is to simply assume you need $1 million in your 401(k) or retirement accounts with your brokerage firm. After all, $1 million is a number often associated with wealth.

Unfortunately, saving a seven-figure nest egg may seem out of reach, especially if you’re getting started investing late or don’t have a lot of spare cash. So, it’s worth looking at whether saving $1 million is really necessary for most people or whether you can get by with less.

Is $1 million really necessary for a comfortable retirement?

While it may be easy to assume you need $1 million, choosing an arbitrary number like this isn’t the right way to set your retirement savings goals. Instead, you should make a personalized plan for the amount of savings you need based on factors like:

Your retirement budget. Will you be living in a high-cost-of-living area and traveling the world? Or will you be staying home and hanging with your grandkids in your paid-off house in a small town? These choices will have a huge impact on the savings you need and the budget you’ll create.Your projected life expectancy. Does everyone in your family live into their 90s? Or do most people pass away at a younger age due to a family history of hereditary conditions? The longer you’re expected to live, the more money you’ll want saved so your accounts don’t run dry.Your income. If you make more money during your working life, you’ll have established a higher standard of living. You’ll need more money to continue to live the lifestyle to which you’ve become accustomed.

All of these examples demonstrate a fundamental fact. Your retirement goals are personal and they directly impact the amount of money you’re going to require.

Here’s how to set your own retirement goals

So, will $1 million be necessary for you to retire comfortably based on your goals? Here’s a simple way to tell.

Most experts say you must replace around 70% to 80% of pre-retirement earnings to maintain your lifestyle. If you plan to spend a lot during retirement, you may want to err on the side of caution and aim to replace 90% or even 100% of what you made before you left work.

Your Social Security benefits are going to take care of replacing around 40%. So, depending on your goals, you may need to replace another 30% to 60% of what you were earning.

If you were making $50,000 per year and you want to end up with 80% of pre-retirement earnings in total from savings and Social Security, that would mean you need $20,000 to add to your $20,000 in Social Security checks.

The 4% rule

Now you need to figure out how much you must have saved to produce $20,000 in annual income. A common rule of thumb says you can take 4% of your balance out of your investment accounts the first year and adjust upward due to inflation if you don’t want your money to run out. This is called the 4% rule.

If you follow the 4% rule, then you can figure out how much savings you need by multiplying the income you want it to produce by 25. So based on this example, $20,000 times 25 means you must have $500,000 saved — only half of the $1 million nest egg you might have thought you needed.

The bottom line

If you need your savings to produce around $40,000 to combine with Social Security and enable you to live a comfortable life, you must save $1 million. But if you think you can get by on less based on your goals, you don’t need to stress yourself out trying to hit that big target.

Instead, set a goal that’s realistic for you and do everything possible to hit it, so you can have the retirement you’ve always hoped for.

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