Wikinvest Wire

Can you retire on one m-i-l-l-i-o-n dollars?

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:

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."
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.

Some advice for those of you in your 20s and 30s - start thinking about this early in life...

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14 comments:

Anonymous said...

After housing, health and cars are the next biggest costs. If you can lock in your health care, and find a place that you can live with public transportation your fine with 1 million bucks! Thats almost anywhere outside the USA.

Anonymous said...

Get the house paid for and you can live on $30K if you have to.

But that misses the point that as life expectancies rise, and most people's incomes are derived from incredibly sedentary jobs, there's not much logic to checking out of the work world completely at age 62 and sitting on one's rear end for the next 30 years.

Scale down, work part time, work a less lucrative but easier job, but whatever you do don't do nothing for 25 or 30 years unless you just really hate work but have plenty of money saved.

Better yet, do what you love, even if you make less, now, and work till you're in your 70's. You'll do better than burning out and trying to retire at age 54.

People who should worry are those with jobs that require manual labor.

cow said...

I'm 26, and I already have a small chunk of money set aside in retirement accounts in the United States; I worked in the public sector there for a few years and we had a great retirement plan. Now that I'm living in Canada, I just started meeting with financial advisors to learn more about how the retirement plans (RSPs and the like) work here.

Apparently, if I max out my RSP contribution ceiling--save 18% of my money per year--and get a decent rate of return over that period, I should retire at age 65 with about $6 million.

I'm not rich now--I make about the median income for my city--but it's just amazing how much a difference starting early makes.

Anonymous said...

My parents are retired with about $1M in a major city. Their house is paid and they are very frugal. So, it can be done no pb. This brings up another $1M question: does $1M mean you're rich? Probably not any more, though worth one's weight in gold still applies imo. That's my goal. When I'm worth my own weight in gold, I officially will consider work to be optional.

little larry sellers said...

Can someone retire and live comfortably on $1 million? The amswer depends on whether a million bucks amounts to squat after Helicopter Ben and company continue to print money and drastically devalue the dollar.

My guess would be that no, a million dollars would not be even close to what is necessary to live the type of lifestyle these people expect. And I'm not talking about future retirees, I'm talking about today's 65 year olds. They may live well now, but things appear to be changing fast on the financial horizon.

Anonymous said...

Just don't get sick! Healthcare costs will sink you fast, and your insurance will probably drop you or deny your claims, that, you can count on - so.... as long as you don't get sick, $1M should be reasonable.

John S said...

$1 million used to be a lot of money. I expect it will be a lot less money 5 years from now.

Don't worry about getting sick though. After 8 years of Obama all healthcare will paid for by the government. But after the age of 65 the only government-approved treatment for serious illness will be assisted "suicide."

Anonymous said...

I am so glad Obama will plans to have the government pay for health care. That way it will be free for everyone.

I hope he can make gas, food and housing free for everyone as well because we all spend far more on gas, food and housing than we do for heallth care - so making those items free for everyone would be a bigger help.

That Obama is an economics genious!

Anonymous said...

$1M is enough to retire on if you know what to hold it in and have your expenses in check.

Anonymous said...

Your an idiot if you think the american health system costs less then a universal system per person. In CA my health plan cost about 1,100/mo for the family, and it sucked. I tried every plan the company offered and they all were bad. In NZ it comes out of my taxes (which are about 1/2 what I paid in CA) and the care is great, we get in the same day, you see the doc for as long as you want, you go in on time, and prescriptions are way low, and refills are free. I met an american doctor here that told me she has much more time with the patients and she is not on call any more. American business is going under because of the high price of health care. When they compete with other country that do have health care they are at a cost disadvantage. I would love to see the usa catch up with the rest of the world.

Expat said...

The question is pointless for probably eighy-five percent of Americans. Those who have one million are probably fine since they planned ahead to get their and not morons. The rest don't have a pot to piss in.

Burn, baby, burn.

Anonymous said...

Why plan for retirement, it depends on too many factors outside of your control anyway (like the investment climate).

Better to plan what work you WANT, really want to do, now and when your 60 something also.

Mathlete said...

Public pensions are only slightly more secure than Social Security.

Anonymous said...

Before you retire: Make a spreadsheet for each year, recording every expense you have in every month of the year (if you don't know how to work a spreadsheet program like excel you'd better go learn). Use categories for these like Entertainment (bar hopping and restaurants), transportation (gas, airfares), special purchases (big ticket items; vacation expenses, etc)), regular purchases (clothes, etc.), taxes, mortgage, medical, dental, etc, be creative in designing this ..record EVERYTHING!

Keep a running total and determine
what your annual expenses are to the penny. The spreadsheet will reveal where your money is going, and how you can adjust. You can manipulate the spreadsheet with scenarios and "what-if's," like what if I curtail my restauranting by half? etc. I think everyone should do this as they approach retirment.

My house is paid for and I drive a Toyota Corolla...I can live easily of $40,000/year after taxes and feel rich..this includes one or two annual long distance trips.

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