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Is $1 million enough to retire?

There is not a "magic number" for how much money is needed to retire comfortably. Everyone's situation is different, so the amount of savings needed depends on your current financial picture and future goals. For example, some people have pensions along with other dependable income sources, such as Social Security, so they may not need to draw as much from their savings/investments.

With that said, $1 million has always been seen in our society as that "top of the mountain" figure that everyone strives to achieve. We all want to be millionaires and have the financial freedom to live our lives the way we want. Of course, $1 million just isn't worth the same as it was 15 to 20 years ago, so that figure actually isn't enough to retire for the vast majority of our population.

Here's a list of five reasons why this is the case:

1. Inflation lowers purchasing power. Things cost more over time. As goods become more expensive, the value of $1 today isn't worth the same amount in the future. For example, if you look at $1 million in 1994 and assume average inflation of about 3 percent, this results in a future value of about $1.8 million. In other words, that is the required amount of savings you would need to have today to match the purchasing power of $1 million 20 years ago. Another way to look at it is that in 20 years, the value of $1 million would actually be about $550,000, due to the impact of inflation.

2. New phase, new costs. You may have your house paid off at some point in retirement, but there will be new potential costs to take into account. For example, health care costs in America are rising exponentially at an 8 to 10 percent clip, and the growth rate of health care spending is projected to be around 6 percent over the next decade. In other words, these costs are rising at a higher pace than inflation AND the growth of the U.S. economy. If you're retired and run into more medical bills, the costs are likely to go up, which may eat into your savings. Beyond health care, you also may need more for assisted living/long-term care expenses, as well as educational expenses if you plan to help pay for college for your kids and/or grandkids. Both of these costs continue to increase at a high rate as well.

3. Life happens. When you're still working and accumulating retirement savings, you may be better prepared to deal with unforeseen expenses, such as a new baby or a medical condition. However, if you're in retirement or getting close to that time, it's more difficult to deal with surprise costs without adequate savings. Most people use emergency funds for unforeseen expenses; it is recommended you maintain an emergency fund even in retirement. Of course, if you're prepared to spend only $1 million on living expenses and an unexpected event happens, you will be in a tough situation.

4. Dependable income sources are a dying breed. Historically, Americans could rely on some type of pension or other defined-benefit plan, along with Social Security, to fund their retirement living expenses. That made it easier to maintain your savings as you didn't need to tap into those buckets (i.e., brokerage accounts, Roth IRAs, bank accounts, etc.) for income. Now, with fewer companies offering pensions to employees and many state-run pensions being underfunded, pensions are not the same reliable vehicle they used to be. Americans must look closer at their investments and savings as a source of income, or look to potentially expensive and complicated products, such as annuities.

5. All retirement pictures are NOT created equal. All of our hopes, dreams and financial situations are unique. And in retirement, we will desire to lead different lifestyles. For this reason, $1 million or $2 million or $5 million means something different to each one of us, and defining a magic number that everyone needs to reach in order to retire will never be feasible. Instead, everyone's financial pictures and goals must be evaluated separately, and it is recommended that this be done with the guidance of a qualified financial planner.

Kevan Melchiorre is a financial adviser and Certified Financial Planner, with a specialization in investment management, at Busey Wealth Management. He can be reached at 217-365-4672 or at kevan.melchiorre@busey.com.

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