Tuesday, June 10, 2008
Via Yahoo! Finance comes this report by Emily Brandon at U.S. News and World Report asking the question that, unfortunately, most aspiring retirees will probably never get to ask - is a million dollars enough to retire on?
A million dollars used to be a lot of money.
It really comes down to two very important questions - how much you spend and how much you can make on your investments or in other retirement income - and giving a good deal of consideration to these two questions at a relatively early age can make all the difference in the world.
(Hint: Spend less, look for ways to boost your investment returns and, if you can, run a low-overhead, small business on the side.)
Part of the problem these days is that baby boomers have gotten used to spending way too much money and investment returns ain't what they used to be since the great bull market in stocks ended at the turn of the century.
About the only retirees anywhere near our age around here are those who worked in the public sector who never got used to spending a lot of money and who now have comfortable pensions.
Yeah, they told you about this when you picked a major in college but, if you were anything like me, you probably just looked at the starting salaries.
For most people, the thought of having to manage $1 million is probably a daunting task, and conventional wisdom on this subject doesn't seem to capture the realities that one faces such as drawdown rates, inflation rates, and expected returns.
If you drew down 4 percent of your $1 million nest egg every year, a share many financial advisers recommend as prudent, you would receive about $40,000 annually, before adjusting for inflation--a pretty comfortable salary outside major metropolitan areas, especially if your house is paid off. Of course, how far that $3,333 a month goes depends on your lifestyle, health, and inflation. Here are three viewpoints on the $1 million question:Wow. I can't imagine what it would be like to retire on $100,000 to $200,000, although, most people don't even have that. Last I heard, about two-thirds of all senior citizens rely on social security as their only source of income which helps to explain why so many septuagenarians now punch a clock at Wal-Mart.
It's probably not enough. Even at a faster rate of tapping a million-dollar nest egg, Michael Farr, president of the Washington, D.C., investment firm Farr, Miller, & Washington and author of A Million Is Not Enough: How to Retire With the Money You'll Need, thinks it's insufficient for most retirees. "A million dollars in liquid reserves like stocks, bonds, and real estate investments you are not living in will generate $50,000 a year [according to Farr's calculations]. After you adjust for inflation it will be entirely gone after about 30 years," Farr says."
For security, try an annuity. The answer to the million-dollar question seems to depend upon who is asking it. "One million dollars should be enough to maintain living standards for the majority of households, including healthcare expenditures," says Mauricio Soto of Boston College's Center for Retirement Research. "But more might be needed for households that make over $120,000."
Stop worrying so much, and get out your golf shoes. Most workers aren't even striving to become millionaires. Nearly two thirds of employees think they'll be perfectly fine retiring with less than $1 million, according to the nonprofit Employee Benefit Research Institute. "The financial services industry has made a good living for themselves scaring people," says Jonathan Pond, a financial planner and author of You Can Do It! The Boomer's Guide to a Great Retirement. "For many people, $100,000 to $200,000 is enough to retire on."
Some advice for those of you in your 20s and 30s - start thinking about this early in life...