Why You Need $1 Million to Retire

July 22, 2008 — -- The occupational hazards of an online columnist are few and far between.

But if there is a danger zone for those of us who write for an Internet audience, it's the comments section of the Web site. It's there that readers have their opportunity to tell us what dopes we really are.

And last week, that's exactly how at least a few readers felt when, writing about the dangers of retiring into a bear market, I used an example of somebody retiring with $500,000 in an IRA.

"McPHERSON NEEDS A REALITY CHECK," wrote (or shouted) GTKERR.

"Who has that kind of money?" added genericjake.

The truth is many do. And many don't.

But the reality is $500,000 is not a lot of money when it comes to retirement. The vast majority of today's American workers need to plan on saving at least that much. And in many cases, they need to shoot even higher. The truth is I would aim for $1 million.

I know to many readers the idea of accumulating a half million dollars or more sounds ridiculous and downright impossible. Let me explain why it's necessary and how it's quite possible. The same answer applies to both questions.

It's called the 401(k) plan.

This creature of the federal tax code has replaced the traditional pension as the dominant retirement plan in the American workplace. The days when an employer will guarantee you a monthly check upon retirement are fading away fast.

You're on your own, and you better wake up to that fact.

If you're retiring within the next few years, there's still a decent chance you will collect a guaranteed pension. But unless you're a government worker, 10 years from now there will be few retirees who can count on one.

That's why you need $500,000 or more.

A married couple, both 65, who are retiring today with $500,000 could buy an immediate fixed annuity that pays them about $37,000 a year for the rest of their lives, according to an annuity calculator on the Vanguard Web site.

Add in $21,000 from Social Security (the average retirement benefit received by married couples in 2008), and you would have an annual income of $58,000. In many parts of the country, a retirement income of $58,000 sounds pretty good.