Will Your Retirement Income Be Enough?
Extended life spans, reduced employer benefits, lower stock market returns and increased costs of living (especially medical-related ones) have all upped the sums required for those sunset years. Unfortunately, most Americans are doing a poor job of securing their future. The Employee Benefits Research Institute reports that if current trends continue, by 2030, the annual shortfall between the amount retired Americans need and the amount they actually have will be at least $45 billion. According to a recent survey from Allianz Life, 28% of workers between ages 55 to 65 are concerned they won’t be able to cover basic living expenses in retirement. If you want to avoid having to flip burgers at age 75, one of the best things you can do for yourself is to calculate now how much you’ll need in the future.
- “Of course you can retire! Live it up and enjoy!” If you are at least in your 70s with reasonable expenses, there is a good chance you and your $1 million fall in this category.
- “The probability for your retirement looks good. Just don’t go crazy and buy a Porsche.” If you are at least 62 and have always lived a frugal lifestyle, then you and your $1 million are likely going to fall in this category.
- “Let’s redefine retirement for you.” This is just about everyone else, including early retirees with $1 million living frugally and 70-year-olds with $1 million spending lavishly.
So, Can I Retire With $1 Million?
Many advisors and financial professionals boil the answer down to one number, also known as the holy grail of retirement analysis: the 4% sustainable withdrawal rate. Essentially, this is the amount you can withdraw through thick and thin and still expect your portfolio to last at least 30 years, if not longer. This should help determine how long your retirement savings will last, and will help you determine how much money you need for the retirement you want. Of course, not everyone agrees that this withdrawal rate is sustainable in today’s financial environment.
If you are 65 with $1 million in savings, you can expect your portfolio of properly diversified investments to provide $40,000 per year (in today’s dollars) until you are 95. Add that to your Social Security income and you should be bringing in roughly $70,000 a year.
Now, if this isn’t enough for you to maintain the lifestyle you want, you have come to your unfortunate answer rather quickly: No, you cannot retire with $1 million.
Projecting Future Expenses
Many books and articles discuss longevity risks, sequence of returns, healthcarecosts and debt. But knowing how much you need to retire still boils down to projecting your future expenses until the day you die. Ideally, that yearly figure will add up to less than 4% of your nest egg.