Types of investment in Mutual Fund

Will Your Retirement Income Be Enough?

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.

  1. “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.
  2. “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.
  3. “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.

Now wait a minute, you say, what about my spouse, who is also getting Social Security? What if I’m 75, not 65? What if I want to die broke? What if I’m getting a government pension and benefits? What if I’m planning to retire in Costa Rica? There are many “what ifs,” but the math is still the math: if you plan on needing a lot more than $40,000 from your retirement nest egg, then the probability of a successful retirement on $1 million is not good.
And early retirement, meaning before Social Security and Medicare kick in, with only $1 million, is extremely risky. You leave yourself with so few options if things go terribly wrong. Sure, you can go to Costa Rica and eat fish tacos every day. But what if you want to move back to the U.S.? What if you want to change? Having more money set aside will provide you with more flexibility and increase the likelihood of continued financial independence to do what you want within reason until the day you die. If you are forced to stay in Costa Rica or get a job, then you didn’t make a good decision and plan.

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.

So a $1 million dollar portfolio should give you, at most, $40,000 to budget. If you are forced to take out more than $40,000 adjusted for time during your retirement, you are tempting fate and relying on luck to get you by. So, if you want at least $40,000 per year, $1 million is really the least amount of money, the bare minimum, you should have before you launch into retirement.
“If you’ve only saved $1 million and are withdrawing 4% or more in retirement, you are most likely tempted to expose your accounts to more risk to make up for the lack of savings. With more exposure to a volatile market, there is a greater chance your retirement accounts will incur substantial losses during market corrections,”
Retirement planning means maximizing your lifestyle while maintaining a high probability of being able to maintain that lifestyle until the day you die. So scraping together a bare minimum nest egg is like an explorer heading into the jungle for a week with just-enough supplies. What if something happens? Why not take extra? “People do not plan properly for income in retirement because they don’t really think about Social Security properly, they compartmentalize their assets, they don’t think about how everything they own can create income, they fail to appreciate the power of leverage in retirement.
So, once you have your $1 million, concentrate on what you can control or, at least, influence. You can’t control when you die, but you can affect your health costs by doing your best to stay healthy until you qualify for Medicare. You can’t control investment returns but you can affect the range of returns. You can’t control inflation but you can affect your fixed costs and your variable costs.

MORE INFO