We read all the time about how much money is recommended for a healthy retirement. Everyone seems to be an expert and the conventional wisdom of $1,000,000 seems to have recently doubled to $2,000,000. How can anyone afford to retire!?

I’ve had the opportunity to work on hundreds of retirement plans, and I’ve never actually run across a “rule of thumb” when it comes to how many digits are in your retirement account. Retirement readiness is more a function of income and income-building capacity, and less about a specific investment value.

I was recently sitting with a client who is planning for retirement. The client was worried that she had not saved enough for retirement. Not because she didn’t have income to pay their bills, but because she had recently found an article on the internet saying that the average retiree needs $2,000,000 to retire. Unfortunately for the client, she only had about $500,000 saved up.

Let us pretend for a moment that everyone is exactly the same and everyone actually needs $2,000,000 regardless of circumstances. This is kind of like saying everyone needs $80,000 a year to live, and everyone dies exactly on their 85th birthday, and everyone has the exact same lifestyle including the same home, the same car, the same hobbies…and so on. Even though we can establish this as a ridiculous concept, let’s just stick with it for a moment while we play with the numbers.

This person only has $500,000 in her retirement account. But she also has a $55,000-a-year state pension. Without accounting for state income tax benefits afforded to state pensions, we’ll assume the conventional wisdom of 4% investment withdrawal rates. This means that if $55,000 a year indefinitely was a lump of investments, it would be worth $1,375,000! Said in another way, she may need an investment portfolio the size of $1,375,000 to generate $55,000 a year indefinitely.

So in an over simplified way, if we were to assign a value to her pension on her balance sheet it would look like:

401(k): $500,000
$55,000 yearly pension: $1,375,000 hypothetical value
Total hypothetical personal worth: $1,875,000

To add to this, she also has a nice future Social Security benefit of $36,000 a year. Without even accounting for the tax benefits afforded to Social Security, she would need at least $900,000 in investments to replace her $36,000 Social Security benefit.

Now her balance sheet looks like:

401(k): $500,000
$50,000 yearly pension: $1,375,000 hypothetical value
$36,000 yearly Social Security: $900,000 hypothetical value
Total hypothetical personal worth: $2,775,000

By the conventional wisdom standard outlined above, she was doomed at only $500,000 in investments when in reality she has the resources of someone who has $2,775,000 in investments. Does this mean she can retire? This actually has nothing to do with whether or not she can retire. What really dictates whether she can retire or not is if she can live off of the $111,000 income that her hypothetical $2,775,000 provides.