One of the most important Financial Planning questions is, “How much money will I need to retire?“
The problem is that there is no magic number that is right for everyone, and it is always a great idea to consult a retirement financial adviser.
But for the sake of this discussion, let’s assume that you have diligently saved, invested well, or been very fortunate and you accumulated a nice sum of capital: $1 million. Is that enough to retire and stay comfortably retired?
Those last 3 words change the picture a little, don’t they? Obviously, one could retire under austere conditions for a period of time with even less money.
For this conversation I am going to use a common yardstick: that people need approximately 80% of their pre-retirement working income to maintain their standard of living during retirement.
Put differently, this means that if someone is earning $100,000 prior to retirement, they will need $80,000 during their golden years. This 80% figure can be debated. Some advisors say you can get by with as low as 70%, while others insist that 90% is a better benchmark.
My experience tells me it is always better to estimate expenses on the high side because of unknowns. Also, I don’t particularly like using rules of thumb. Why? Because they ignore the other fingers. Important fingers.
In days gone by the standard of financial success was to accumulate $1 million. We even had a show called “Who wants to be a Millionaire?” Well honestly, who doesn’t? “If I could only win the million, I would be on easy street.” Well, would you?
If you won $1 million on the last day of the show in June 2002, after inflation, I estimate it would be worth $760,000 in today’s dollars. The point I am making is that inflation is an important consideration in your retirement calculation.
In the years before 1974, the United States was on the Gold Standard. The value of the dollar was fixed to the price of gold at $35 dollars an ounce. The dollar was as “good as gold.” As of this writing the price of gold has increased to $1,335 an ounce and may be on the rise. That’s an increase of 3800%!
Remember the movie Austin Powers, when “Dr. Evil” awakens from a three-decade trance and devises a plot to hold the world ransom for $1 million? His assistant (number 2) informs him that $1 million is not as nearly as much money as it used to be, so he changes his demand to $100 billion. Now that’s inflation!
Over the past few years the inflation rate has averaged 1-3%. But let’s not forget 1980 when the inflation rate was 13.5%. Could we see those numbers again?
I believe that inflation must be addressed in any retirement calculation.
The cost of gold is not the only thing that has changed since the 1960’s. People are living longer.
According to the Social Security website “one out of four 65-year-olds are expected to survive until age 90.” This means that a married couple age 65 today has a 50% chance of one of them living to age 90 or beyond!
I remember one of my instructors in business school saying, “If you can just tell me how long you are going to live, I can create the perfect retirement plan for you.”
Of course, life expectancy is one of the principal variables in any retirement calculation. If you are feeling overwhelmed by how much needs to be included in calculations, you can always consult a retirement financial adviser.
A major factor when deciding if $1 million is enough to retire is your expected standard of living during retirement. What is your vision for the future?
First, you need to examine what you are currently spending for housing, food, utilities, etc. Next, you must look at what you expect to spend once you retire.
Will you pay off your mortgage? Will you remain in your current address or move to a new location? Some of our clients move to states with a more favorable tax structure or lower cost of living, or to just to be closer to children or other relatives.
Over the course of my career, I have had clients move to other countries and even mobile homes as ways of lowering taxes and living expenses.
The question is: What will your spending rate be when you retire? Will it be $30,000 per year or many times that?
The bottom line is: How much do you need to spend to be comfortable and content?
How Hard Must Your Money Work?
One of my first lessons after entering the field of financial planning 25 years ago came from one of my mentors in the field who explained to me, “Once you retire, your money must work for you, or you must go back to work!” It has a ring of truth to it, doesn’t it?
Let’s continue our discussion and make a few assumptions:
You have determined that you need to obtain a 4% inflation-adjusted return each year, or $40,000, to maintain your standard of living. Whatever your required return number is, a corresponding portfolio must be constructed.
Declining interest rates mean retirement savers are getting less income from their accumulated wealth. As of this writing, CD (certificate of deposit) rates are currently below 1% per year.
Five-year treasury bonds are at a rate of 1.42 %. This indicates that in order to obtain a 4% inflation-adjusted return each year it will be necessary to invest the money, rather than positioning it in interest-bearing vehicles such as CD’s, Bonds, etc.
A well-designed investment strategy is a key part of any retirement plan, and is beyond the scope of this article today. It involves a wide level of diversification, risk vs. return analysis, and tax management.
It is very important to consider heath care costs as you are considering your retirement. You won’t qualify for Medicare until you reach 65. So unless your employer provides insurance for you, you will have to purchase insurance on your own until you qualify.
After qualifying for Medicare many people consider a Medicare supplement plan to limit the out-of-pocket expenses on Medicare alone.
Estimating health care expenses in retirement has never been easy, and it hasn’t changed since health care reform.
In theory, the new legislation is supposed to halt the rising health care costs, including Medicare. For projection uses, I would assume that health care costs will continue to increase because of the increased need for services that will be required by aging baby boomers.
Fidelity Investments, a leading provider of employer benefits, announced the results of its annual Retiree Health Care Costs Estimate that found a 65-year-old couple retiring in 2013 will need $220,000 to pay for medical expenses throughout retirement, not including nursing home care.
The survey assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program Medicare.
The Fidelity estimate takes into account cost sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). The estimate does not assume a Medicare supplement plan.
As you can see, it’s essential to incorporate future medical expenses into today’s retirement plans. In the past, retirees relied on their former employers to provide health care coverage, but this is no longer something on which most of today’s retirees can rely.
What specific information do we need to develop a plan so that the often lacking “rules of thumb” can be retired (so to speak)? Other fingers:
- How much money will you need to spend yearly to be happy and content?
- What do you expect inflation to average over your retirement?
- What rate of return is needed on your capital to accomplish your desired income?
- How much money will you draw from Social Security and other pensions?
- Do you expect inheritance?
- Do you or your spouse plan to work on another career or part-time?
- How long do you plan to live? Do you have long longevity in your family?
- Will your mortgage and other debts be eliminated prior to retirement?
- Tax Rates – It is important to understand that the tax implications of having $1 million in an
- IRA or 401k are very different than having $1 million in Municipal Bonds or dividend-producing stocks.
In my opinion, deciding when to retire is the single most important financial decision of your life, and often you don’t get a “do over.” So you should really consider consulting a retirement financial advisor.
Is $1 million enough? For a modest retirement, in many areas of the United States, $1 million may be enough depending on the factors stated above. However, it very well may not be!
I hope this article starts you on the track to developing your own comprehensive retirement plan with the help of a qualified advisor, so that you can enter retirement with all of your fingers, and a couple of thumbs up!
Not planning for your retirement may be hazardous to your wealth.
At Medallion Financial Group, we believe financial planning is about Family. We have been helping families invest in the future since 1987 through a holistic planning approach. We recognize there are a variety of needs when it comes to retirement planning, plan rollovers, annuities, college planning, life insurance options, and investment management. It is easy to get lost in a sea of choices. Our financial advisors help with the basics and beyond to enable our clients to get the education, advice and management they need to retire with confidence.
Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.
We strive to exceed client’s expectations – because we have high expectations of ourselves.