I want to retire with $1 million.
This is something that a few people have said to me lately. And I always wonder where they came up with that number.
Somewhere along the line it seems like $1 million has become the Holy Grail of retirement account balances. It’s great to have that goal, but I think that your future deserves more thought.
$1 Million May Not Be Enough
For a lot of people, $1 million in retirement accounts may not be enough to sustain their current lifestyle in retirement. Consider the 4% rule of thumb. This rule says that you can withdraw 4% of your portfolio each year in retirement with a high probability of not outliving your money – otherwise known as the safe withdrawal rate.
Using the 4% rule, if you retire with a portfolio of $1 million, then you could withdraw $40,000 per year to live on. Recently, the “creator” of the 4% rule said that he believes the safe withdrawal rate may actually be closer to 5%. If we use a 5% safe withdrawal rate assuming a $1 million portfolio, then you could withdraw $50,000 per year to live on in retirement.
And if those portfolio withdrawals are from a tax-deferred account like an IRA or a 401(k), then you’ll have to pay taxes on those funds which will lower the amount available to spend.
In June 2020, the average Social Security benefit was $1,514 per month. That’s $18,168 per year.
If we add up the safe withdrawal rate from a $1 million portfolio and potential Social Security benefits, then maybe you have total annual retirement income of $58,000 – $68,000 before paying taxes.
Is that enough?
If it is enough to support your month-to-month spending, then what about those extra expenses that don’t fit into that number like home repairs, new cars, vacations, etc.? You have to take those expenses into consideration as well. Otherwise, you could end up withdrawing too much from your portfolio too early in retirement and end up having to rely on Social Security only in your later years.
It May Have To Last A Long Time
One million dollars seems like a lot of money to most people. And it is. But, that $1M has to last from the time that you retire through the end of your life, which could be 30 years or more.
A lot of people are tempted to live lavishly in the beginning years of retirement so that they can enjoy it while they’re healthy and mobile. There’s absolutely nothing wrong with that, but it’s also important to take into consideration what the scenario of withdrawing too much from your portfolio too early in retirement might look like and whether or not you’re okay with that.
(Check out this infographic from Visual Capitalist that helps quantify a million and provides some information on millionaires: $1 Million Isn’t Worth What It Used To Be.)
Take a look at this 2017 Period Life Table from the Social Security Administration. The table shows us that a male who was 55-years-old in 2017 had a .007766 probability of dying within one year and an average life expectancy of 80.5-years-old. A female of the same age in 2017 had a .004813 probability of dying within one year and an average life expectancy of 83.81-years-old.
The Full Retirement Age for Social Security (the age at which you can begin receiving Social Security benefits and they will not be discounted) for those born in 1960 and later is 67-years-old. If you start taking your Social Security benefits prior to your Full Retirement Age (FRA), then they will be discounted for the rest of your life. A male who was age 67 in 2017 had an average life expectancy of 83.47 and a female who was age 67 in 2017 had an average life expectancy of 85.86.
Keep in mind that this is average life expectancy, meaning that there’s a good probability that you could live longer than these expectancies. The point is that you may need to rely on your retirement funds for a long time once you start drawing on them. There’s a real risk to withdrawing too much from your portfolio early in retirement and not having anything to supplement your Social Security benefits later on.
You Could Retire With More Than $1 Million
I think that seeing how ‘little’ annual income can safely be produced by a $1 million portfolio is often very shocking to people. I don’t know this for a fact, but I bet that many would think that having a $1 million retirement portfolio would mean that they could live on much more than $40-50K per year.
Many people who begin saving a significant portion of their income for retirement early will surpass the $1 million portfolio mark before they retire.
For example, if a 30-year-old couple earning $100,000 gross per year saves 15% of their income ($15,000) for retirement each year until age 67 and they earn an average 5% portfolio rate of return over that time, then they could retire with over $1.5M. And this doesn’t account for increases in income and subsequent increases in retirement savings along the way.
If they were to earn an average of 6% rate of return over that time period, then they would retire with $1.9M.
If you start investing for retirement early, then you could retire with over $1M. If you’re starting later, then you need to understand the circumstances that you’re working with and potentially adjust your retirement expectations accordingly.
No matter what boat you’re in, you owe it to yourself to start thinking more seriously about your future and your goals.
Start today.
(Of course, there are a lot of assumptions built into these scenarios. It’s important to keep in mind that your particular situation could be drastically different and that this is for educational purposes only.)
