There’s a rule of thumb in financial media that you need a million dollars to retire. For some clients though, the idea of saving up a million dollars or more to retire sounds daunting. In my opinion, not everyone needs a million-dollar balance, and the sacrifices it would take to get there might not be worth it. So let’s look at the (pardon the pun) million-dollar question many of you may be asking: “How large of a 401(k) balance do I need?”

How much money you need in retirement depends on how you plan to use it. Your retirement account can either be a chicken that produces a yearly egg, or it can be a chicken that you eat (freezing it and eating a little bit each year).

Ways to use a 401(k) balance

I believe most people are much better off having a chicken that produces eggs. In money terms, this means converting your balance into some type of fixed annuity when you retire.

There are different types of annuities, but the basic premise is the same. You purchase an annuity from an insurance company, often with a lump payment. Then, the insurance company pays you a fixed amount each year, usually for the rest of your life. The downside is you forfeit the amount you used to purchase the annuity. If you die the next day, your heirs won’t recoup the money. However, if you live a long time, you won’t have to risk running out of money.

On the other hand, you could come up with a system for eating the chicken itself. This means figuring out a withdrawal strategy where you pull money out of your account. You can do this systemically, pulling out a certain percentage each year, or taking it out as you need. With the latter, there’s a real risk that you could run out of money with no hedge.

If you’re pulling out a percentage, research usually suggests taking around 4 percent a year. And, if you think you need $40,000 per year in income, that means you would need that $1 million balance. Plus, to ensure that you have money for the rest of your life, you will likely need to keep your principal invested so it can continue to potentially grow. That means exposing yourself to the risk of the market. And if the market takes a hit one year, your 4 percent withdrawal could be much less than $40,000 some years.

Whether you plan to use your account like a chicken or an egg can influence how much you need to have when you retire.

Your 401(k) balance

Of course, whether you can live on 4 percent of your total savings may depend on whether you have enough saved to do so. For now, let’s come up with your ideal amount. Assume:

  • You want to live on $75,000 per year at the start of retirement
  • Social Security will pay $25,000 per year at the start of retirement
  • You have no pensions
  • Inflation will hover around 4%
  • Your risk comfort suggests a portfolio that is half stock and half bonds (Get a risk assessment here)

That means your 401(k) balance needs to provide you with $50,000 per year to start, with a 4 percent annual raise to offset inflation.

Let’s say you like the “egg” strategy and want to pass the risk of outliving your money onto an insurance company. In this case, you need a 401(k) balance large enough that it can be converted into a fixed annuity with a 4 percent cost-of-living adjustment at retirement.

Let’s say that will likely cost you somewhere in the neighborhood of $600,000 to $800,000 at the start of retirement. (A financial planner can help you determine these goal numbers). Several factors might vary that amount, which are too complicated to get into here. Suffice it to say that as you get closer to retirement you and your advisory team can make adjustments.

How to calculate your target balance… then meet your goal

Financial planning is about balancing multiple goals and needs such as your children’s education, mitigating the risk of premature death, retirement planning, emergency funds, etc. as you determine what balance is right for you. (See

Not only can a financial planner help you determine “your number”, but they can also help you make sure you’re on track to get there. This includes helping you ensure you’re saving enough each month, and making sure your portfolio is designed with the appropriate amount of risk (and target returns) to help you reach your goal.

At Envision Wealth, James Brewer is a Certified Financial Planner™ and supervises his team to ensure they meet the same financial planning and fiduciary standards.

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