Image: The nest egg
Via Forbes
A famous financial planner’s rule of thumb is that you can spend 4 percent of your initial savings per yeark, adjusted for inflation, and it will last for 30 years.
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updated 8/19/2011 7:40:09 AM ET 2011-08-19T11:40:09

So here’s a sign of the times: $1 million isn’t enough to retire on anymore.

To be clear, here’s what we mean by $1 million: We’re including what you have in any savings and retirement accounts, including tax-deferred plans like 401(k) and IRAs. You’ll still have to pay taxes when you withdraw money from those. We’re also including the present value of any pension accounts and Social Security payouts.

When you run those numbers, and compare them with how much you’re spending, you may be in for a shock. “Americans just plain are not saving enough,” says Fred Reish, a lawyer at Drinker Biddle in Los Angeles specializing in retirement issues. “It’s a huge crisis.”

Forbes.com slideshow: Do you have enough money to retire? 

A famous financial planner’s rule of thumb is that you can spend 4 percent of your initial savings per year, adjusted for inflation, and it will last for 30 years. If you have $500,000 saved, 4 percent of that is $20,000 per year. Can you live on $20,000 per year, plus whatever you’re going to get from Social Security and a pension (the $20,000 and — for now — Social Security)? If you can’t, then you’d better start saving more or thinking about when and how you plan to retire.

The good news if you’re retiring soon is that you’ll probably be getting Social Security. To find out the present value of that, go to the Social Security Administration’s web site and find the retirement estimator. That will show you an estimate of the monthly check you’ll get if you elect to retire at age 62 or if you delay it until age 70.

And if you have a pension, that could help a lot. Rachel Sanborn, a fee-only planner in New Hampshire, recently worked with two clients who had $500,000 in savings accounts between them. She found herself surprised to see that they could retire with just that, but they can because they have two pensions — one client was a teacher, the other a state employee. For tips on verifying your pension, click here.

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The bad news is that people are spending more in retirement on health care, utility bills, and particularly on mortgages. “The real reason why $1 million is not enough, sadly, is because a lot of people still have mortgages coming into retirement these days,” says Eileen Freiburger, a fee-only planner in Manhattan Beach, Calif. “I would never let a person retire if they haven’t learned to live within a certain dollar amount,” she says.

Of course, everyone is different. Some people, especially in low-cost areas of the country, with no mortgages or kids to support, will be just fine with $1 million. If you’re the kind of frugal person who has driven the same, beat-up Ford car for the past 20 years, this is your moment to shine.

But the typical overspending American might want to start worrying. “It’s an unpleasant conversation, but people really have to be aware of this,” says Kent Grealish, an hourly-rate investment advisor near San Francisco. To figure out what you have, and what you need, see the attached slideshow. (Note: The people pictured in the slideshow seem serene and almost blissful — don’t expect to feel the same.)

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Forbes.com: How to retire early

If you don’t have enough, it’s time to make some tough choices. Consider working longer or getting a part-time job in retirement. “That’s the most powerful choice you have,” says Grealish. “It’s one more year of accumulating assets, one less year of drawing on those.”

If you have enough squirreled away, it’s often a good idea to delay taking social security. While you’re eligible to take it at 62, if you wait until age 70, you’ll get a bigger check. If you do that, and hopefully live a long time, you’ll be locking in an 8 percent return that will pay off in the long run.

Also, spend less. Avoid Apple, Best Buy, Nordstrom, or whatever your temptation may be. You might want to move to a lower-cost state.

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Reassess your situation every year, says Grealish. If your investments don’t perform as well as you expected them to, you could be at risk of running out of money before you die.

But get ready to feel poor, even if you’re a millionaire. There’s a reason Travie McCoy sings about wanting to be a billionaire — with a B — “so frickin bad.” One million bucks just doesn’t go far enough anymore, it won’t even pay for retirement.

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