Why the “$2 Million to Retire” Rule Is Misleading
If you’ve ever Googled “How much do I need to retire?”, you’ve likely come across articles touting a magic number—$1 million, $2 million, or even $5 million—as the golden ticket to a stress-free retirement.
It’s a comforting thought: hit one target and you’re done. Unfortunately, this “one number” mindset is not only misleading, but it can lead to poor decisions, unnecessary anxiety, and under (or over) spending in retirement.
Let’s break down why the idea of a magic retirement number is flawed, and what you should focus on instead.
The Problem with the “One Number” Approach
The notion of one retirement savings number ignores everything that makes your situation unique, including:
- Your lifestyle, goals, and spending habits
- The age at which you retire
- Where you live
- Risk profile (including your emotional capacity to handle the inevitable market sell-off)
- Your life expectancy and health status
- Future tax rates and inflation
- Social Security, pension, or rental income
- Investment returns and sequence-of-returns risk
For example, two retirees could both have $2 million saved. One could have more than enough (Read “What is your Enough?”), the other at serious risk of running out of money.
Retirement Is a Cash Flow Problem, Not a Balance Problem
Retirement is not about accumulating the largest account balance. It’s about ensuring your income can sustainably cover your spending for as long as you live.
Ask yourself:
- What will your annual expenses be in retirement (including healthcare and inflation)?
- What guaranteed income sources do you have (e.g., Social Security, pensions)?
- What withdrawal rate from your portfolio is realistic given your risk tolerance?
A retiree who needs $60,000/year and receives $35,000 from Social Security only needs $25,000 from investments.
A retiree who needs $120,000 with no pension may need a very different asset base.
Let’s look at a couple different retirement examples
Retiree A:
- $2M portfolio
- Lives modestly on $60,000/year
- Receives $35,000 in Social Security
- Modest home with a low cost of living, low tax state
- Excellent health
Retiree B:
- $2M portfolio
- Spends $120,000/year
- Minimal guaranteed income
- Lives in a high cost of living, high tax state
- Supports adult children
- Has health issues
Same number, likely very different outcomes.
Source: RightCapital
Two retirees start with $2 million. One ends up with more than $3 million, the other is running low. Same number, totally different outcomes. Retirement isn’t about hitting a magic number, it’s about how you live, spend, and plan.
The Danger of Sequence of Returns Risk
Even if two retirees have identical portfolios and identical spending, when they retire can make all the difference.
Sequence of returns risk refers to the danger that early losses in your portfolio—right after you begin withdrawals from your retirement—can permanently impair your long-term success.
For example:
- Experiencing a bear market (-20%) in the first three years of retirement may result in a double whammy; investment losses & portfolio distributions to meet expenses.
- This reduces the portfolio value for future growth and increases the chance of running out of money.
Source: TD Ameritrade
Both portfolios start with $10 million, take the same withdrawals, and earn the same average return, but the order of returns makes all the difference.
How to Reduce Sequence Risk
You can’t control markets, but you can reduce exposure to sequence risk through sound risk management:
- Diversified, Risk-Aware Portfolio
Use an asset allocation strategy that manages downside risk. Diversification across asset classes (multiple equity classes, fixed income, real estate, precious metals, digital assets) can help buffer volatility. Are you taking too much risk? Click here to find your risk number - Cash Reserve or Emergency Fund
Keep 6-12 months of living expenses in cash or short-term bonds to draw from during downturns, allowing your portfolio to recover without forced selling. - Tax Location Flexibility
Hold assets across taxable, tax-deferred, and Roth accounts. This allows for tax-efficient withdrawals based on market conditions and income thresholds. - Dynamic Withdrawal Strategy
Adjust withdrawals in response to market performance. Spending more in upmarket years, and less in drawdown years.
Build a Plan, Not a Wild Guess
Instead of aiming for an arbitrary number, build a dynamic, personalized plan that factors in:
- Current and future spending needs
- Proactive tax strategy (e.g., Roth conversions, withdrawal order, effect of tax changes)
- Market volatility and sequence risk (Read “Is Your Retirement Plan Ready for Market Volatility?”)
- Contingency plans (e.g., long-term care, widowhood)
- Longevity projections
Pure Portfolios’ retirement planning process can help you find your enough, mitigate sequence of return risk, and run scenario analysis based on your personal circumstances.
Rather than rely on hunches or what other people are doing, we can help you answer common retirement questions that is all about you…
When should I take Social Security?
Should I do a Roth conversion?
Can I afford a second home?
Money is emotional. Let us help you make data-backed decisions based on what works.
Ready to cut out the guesswork? Get started with a financial plan here!