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Even a $1 million retirement nest egg isn't enough anymore

  • With more retirees responsible for their own financial security, even a $1 million nest egg isn't nearly enough.
  • Considering the looming retirement savings shortfall, experts say there are only two ways out: Earn more or spend less.

A cool $1 million has long been considered the gold standard of retirement savings. These days, it's only a fraction of what you will really need.

For instance, a 67-year-old baby boomer retiring now with $1 million in the bank will generate $40,000 a year to live on adjusted for inflation and assuming a sustainable withdrawal rate of 4 percent, said Mark Avallone, president of Potomac Wealth Advisors and author of "Countdown to Financial Freedom."

It's worse for a 42-year-old Gen Xer, whose $1 million at retirement will only generate an inflation-adjusted $19,000 a year when all is said and done. And a 32-year-old millennial planning to retire at 67 with $1 million would live below the poverty line.

That's what Avallone, a certified financial planner, calls "million-dollar poverty."

"People have to self-fund their retirement, and the enormity of that challenge is underestimated." -Mark Avallone, president of Potomac Wealth Advisors

For most Americans, there's been a serious lack of proper investment income and planning, Avallone said. That, coupled with inflation, a looming pension crisis and longer life expectancy, is "a toxic formula for successful retirement," he said — one that will result in a dramatic drop-off in lifestyle for retirees.

"Today's generation of working people grew up in an era where their parents went to a mailbox, and a check appeared. But pensions are almost extinct," Avallone said. "People have to self-fund their retirement, and the enormity of that challenge is underestimated."

GoBankingRates conducted a study this year to determine how long a nest egg of $1 million would really last. The personal finance site compared average expenses for people age 65 and older, including groceries, housing, utilities, transportation and health care.

Naturally, depending on where in the U.S. you live, the longevity of a $1 million nest egg varies. Those dollars stretched furthest in states like Mississippi, Arkansas and Tennessee, where retirees could live a life of leisure for at least a quarter of a century.

However, in Hawaii, where residents pay roughly 30 percent more for household items across the board, that same amount will only get you just shy of a dozen years — largely because of that higher cost of living and pricey real estate.

Considering that many families spend more than 100 percent of their income after taxes on monthly expenses alone, there are only two ways to overcome million-dollar poverty, Avallone said: Earn more or spend less.

For those nearing retirement, Avallone suggests getting a side gig, or "hobby job," and then saving 100 percent of that income.

"The key is to automatically deposit that money in a savings or investment account," he said.

Alternatively, take a hard look at your expenses and differentiate between what's necessary and what's discretionary. Then identify expenditures that can be cut back — which involves making some very tough decisions.

"Some are small, like lunches, but they add up," he said. "Others are big, like private school."

More from personal finance:
How far $1 million goes in every state
Scraping by on a $100,000+ income
How to prepare for being 'suddenly single'