ANSWERING THIS question is surprisingly easy. Start by figuring out how much pretax income you want each year in retirement. Next, subtract what you expect to receive from Social Security and any employer pension plan. Whatever amount that leaves—let’s say it’s $40,000 a year—will need to come from your savings. You multiply that $40,000 by 25 and you have your answer: $1 million.
Sound like a huge sum? Keep a few things in mind. First, as you save for retirement, you should get substantial help from investment compounding. Much of that help will likely come in your final decade in the workforce. By then, you should have a fair amount amassed, so even modest market returns can mean a big dollar increase in your nest egg’s value. Indeed, it’s possible that, during those final 10 years in the workforce, the value of your portfolio could double.
Second, if your nest egg isn’t as plump as you’d like, you might delay retirement by a year or two. That can give a big boost to your portfolio, because you’ll have more time to save and to collect investment gains, while also putting off the moment when you start tapping your nest egg for income. Alternatively, you might explore working part-time in retirement, which can be equally beneficial.
Third, if you find yourself falling short of the portfolio you’d hoped for, you can always squeeze more income out of your nest egg by using part of your portfolio to purchase an immediate fixed annuity that pays lifetime income. Similarly, during your initial retirement years, you might opt to cover your living costs entirely out of savings, while delaying Social Security to get a larger check. That’ll give you another stream of guaranteed lifetime income—one that rises each year with inflation.
Still coming up short? Look for ways to cut spending. The obvious step: Trade down to a smaller home. If that doesn’t work, you might consider a reverse mortgage, though that should probably be a last resort.
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