Who Needs to Be a Millionaire—for Retirement?

August 19, 2021 Carrie Schwab-Pomerantz
How much do you really need to retire?

Dear Carrie,

My 32-year-old daughter is saving consistently for retirement, but she recently confessed her discouragement at hearing you need at least $1 million to retire comfortably. Is that truly how much she'll need?

—A Reader

Dear Reader,

With some financial experts saying you'll need a million dollars—or more—to retire, I don't blame your daughter for feeling discouraged. Throwing around big numbers is easy, but saving that much can definitely be a challenge.

The good news is that saving consistently when you're young gives you a much better chance of reaching your goal, thanks to the effects of compound growth—and your daughter still has plenty of time on her side.

But more to your point: Does everybody need $1 million or more to retire comfortably? No—some will need less, some will need more. Indeed, being a millionaire is no longer the measure of wealth it once was, especially in areas with high housing and living costs. It all depends on when she wants to retire, where she'll live and under what circumstances, and what other income sources might be available to her. In short, your daughter's retirement savings goal should be based on her personal situation rather than a rule of thumb.

Let's take a look at how much your daughter might need to save—and what it will take for her to get there.

Finding her number

It's hard to think so far ahead when you're young—and there are a lot of variables that can change in the intervening years—but planning now will help her get a realistic handle on how much she should save for the future.

Conservatively, she might want to assume she'll need to spend about as much in retirement as she does today to maintain her current standard of living—less certain expenses like retirement contributions and payroll taxes that she likely won't have when she's retired.

That said, retirement is dynamic, and everyone's situation is different, so it may help for her to dig into the details of her expenses and use a monthly budget planner to determine her specific income needs. From there, a useful guideline is to aim for a portfolio that's 25 times the amount she'd like to withdraw during her first year of retirement, after accounting for potential guaranteed income sources like Social Security, pensions, and annuities.

So let's say she currently earns $60,000 and expects to receive $20,000 in annual Social Security benefits. That means she'll need to withdraw $40,000 from her savings in her first year of retirement. Using the calculation above, she would need to save $1 million ($40,000 × 25) to support her income needs for a 30-year retirement. Fortunately, saving that much may not be as difficult as it seems.

Reaching her number

So, what does it take to save a million dollars? When you're young, not as much as you might think.

If you were to start saving at age 25, for example, you'd need to sock away about $508 per month (and earn a 6% average annual return) to reach $1 million by age 65. If you were to start saving at age 35, on the other hand, you'd need to save $995 per month, or almost twice as much (see "Time is of the essence," below).

Time is of the essence

The sooner you start saving, the less you need to sock away each month to reach $1 million by age 65. 

The sooner you start saving, the less you need to sock away each month to reach $1 million by age 65.

Schwab Center for Financial Research. Examples assume a 6% average annual return. Monthly contributions are rounded to the nearest dollar. This chart is hypothetical and for informational purposes only.

If that number feels unrealistic given her current income, talk about reasonable steps she can take to make it work for her. For example, is she contributing at least enough to her retirement plan to capture any employer match? If not, encourage her to do so—it's effectively free money! If she isn't able to save any more right now, can she commit to increasing her contributions at the start of every year or each time she gets a raise? And finally, is her portfolio invested for long-term growth—meaning with a healthy allocation to equities, which tend to have a higher rate of return than, say, bonds?

The good news is that she has time to make up for any shortfalls in her nest egg—so long as she commits to saving and investing consistently. Reaching a financial goal is a confluence of making large and small positive changes that can add up over time.

Making a plan

Help her create a list of goals (big and small) and when she'd like to reach them. Then establish a baseline that includes her net worth, current expenses, and sources of income. This will show her where she is right now and what steps she needs to take next, as well as identify gaps in her strategy.

These ideas may be commonplace to you, but they may be eye-opening to your daughter and help her feel more in control. Schwab MoneyWise® contains great information for beginners of all ages. If you're comfortable, you could even share your own retirement strategy—or take it a step further and encourage her to talk to an advisor. Just as it's never too early to start saving, it's never too early to start planning. A financial planner can help her strategize the best way to reach her aspirations—not just for retirement but for other goals, as well.

To me, saving can be liberating when it's on your terms. Your good counsel—and a personalized financial plan—can help free her from other people's financial expectations and set her on a positive course toward the retirement that's right for her.

How much will you need to retire?

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Annuity guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.

Investing involves risk, including loss of principal.

Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.