Candidly, $10 Million Isn’t Enough For The Best Retirement.

Among Americans in their 70s, the median 401(k) balance is just $86,301 while the average is $393,826, according to Empower. That’s a far cry from $10 million.

Still, there is a lot of emphasis on hitting that $10 million number among a group of early retirees who are part of the Fat FIRE Movement. This movement is focused on becoming financially independent at a young age, amassing a huge nest egg so you can live a great life, and retiring early. 

While $10 million absolutely sounds like a lot of money, and is more than most people could ever dream of, the reality is that if your goal really is to retire early and live a lavish lifestyle, that amount probably isn’t going to cut it. Here’s why. 

A $10 million nest egg may not go as far as you’d think

There’s no question that $10 million is a substantial amount of money, but if you plan to live a rich lifestyle for decades and expect your savings to support you for that entire time, it suddenly can seem a lot less generous. 

Let’s look at what $10 million can actually provide for you to live on. Most experts now recommend a 3.7% withdrawal rate if you want to maximize the chances of your money lasting during a 30-year retirement. However, early retirees may want to be a little bit more cautious because if you retire at 40 or 50, your savings may very well need to last more than 30 years. You also don’t want to take a chance on running out of money in your 70s or 80s after you haven’t been working for decades. 

So, let’s say you decide to be conservative and choose a 3.5% withdrawal rate. With $10 million invested, you’d have $350k to spend. Sounds pretty good. But, you have to take a lot of expenses into account.

Taxes are going to take a chunk of this money of course, and you may also face high healthcare costs if you retire before Medicare age because buying coverage without an employer is expensive. So is paying copays and coinsurance costs on individual policies that don’t tend to be as comprehensive as workplace plans. 

By the time you take all these required expenses out of your budget, you may not have a ton left to live on — especially if you are in a high-cost-of-living area, face expensive property taxes and living expenses, and want to travel. 

How much should you have saved for retirement?

The reality is that setting an arbitrary number as a retirement savings goal is never a great idea regardless of whether it’s $2 million or $10 million. That’s because it may not be the right number for your personal situation given your desired spending habits.

The best thing to do is to figure out how much you actually plan to spend in retirement and work backward from there. You can set your budget based on your planned expenses, or by assuming you need to replace a certain percentage of pre-retirement income such as 80% or 90%. 

Once you have decided how much income you need, you can figure out how big your nest egg must be. So, let’s say you determine you need $425K to spend because you must cover healthcare costs, a big mortgage that you’ll retire with when leaving work early, and some expensive trips eaach year. If you’re going to follow a 3.5% withdrawal rate, multiply your desired income amount by 100 and divide by 3.5 to find that you need $12.143 million invested for your future. 

You can also work with a financial advisor to help you set your personalized number, and that may be the best approach since an advisor can help you ensure that there’s nothing you are overlooking when it comes to costs you’ll incur as a retiree. Your advisor can help you look at the big picture so you can set a savings goal that will set you up for the retirement you’ve been dreaming of. 

If that amount is more than $10 million —  and it very well might be — it’s best to know that sooner rather than later so you can make a plan to save what you need for a secure future. 

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