Is $1 Million Enough to Retire?
In this article, we're going to discuss some misconceptions people have about money and retirement. For instance, most people know that $1 million is quite a lot of money. However, is it enough for a married couple (or individual) to retire on?
Luckily, unlike most discussions of this type that say "it depends", I am going to give you a "yes" or "no" answer at the end.
That means I don't have to spend the whole article saying "it depends on this" or "it depends on that." Instead, I'm going to create a scenario to help you better understand why the answer is what it is.
Understanding the Theoretical Couple
We need to start by laying out some details about the couple's life. This will not only make them seem more real but will give us an idea of who they are and how they might plan to use their money. I wanted to keep their plan pretty basic, so it would be easy to understand and to compare to your own financial situation.
However, I want you to remember one thing as you read this article. That is, not running out of money shouldn't be your only retirement goal. You should also be taking steps to make your retirement more peaceful, productive, and comfortable. You don't just want to be sitting inside counting pennies. You should be able to enjoy yourself and the world around you.
In our example case, the husband is age 71, and the wife is age 69. They live in a home valued at $500,000. Since their home is paid for, they aren't going to be using this home to fund their retirement. You can imagine what state or city that they might live in, but it's worth noting that Georgia and Florida are the two retirement states in the country.
For social security, one of them is receiving $1,500 a month, while the other is receiving $1,000 a month. They also have $1 million in investible assets. 50% of this $1 million portfolio is in pre-tax retirement accounts, and 50% is in after-tax retirement accounts like brokerage accounts and Roth IRAs. Between income and expenses, they should be enough for the couple to live quite comfortably until the age of 90. The Importance of Age and Health
When I entered this industry in 1998, the average life expectancy for men was gone from 70 to 76 and from 76 to 80 for women. With new advances in medicine and healthcare being made all the time, there's no telling how long our couple might end up living. Indeed, our estimate of 90 might end up being quite conservative. However, you have to have a bellwether of some kind. I certainly don't ever want to have a client run out of money, so I typically will use an age estimate of at least 85 when making my projections.
So, while life expectancy has gone up, there's still the factor of health to discuss. It is very important that we understand how health and money can drastically affect any couple's ability to fund their retirement. For instance, what if the health of our couple declines to the point that they end up in an assisted living facility or nursing home? How would this affect the money, health, and life expectancy factors?
After all, these facilities are very skilled at keeping people alive because that's how they make a living. Those people that spend their days in the facility's care are clients. Since they are unable to take care of themselves, the nurses and caregivers at those homes can implement strategies to keep them alive much longer than they would if they were independent. Of course, residents are not allowed to smoke. The facilities don't put a lot of salt in the food, and they have all types of daily health evaluations to ensure they maintain a healthy immune system, proper blood pressure levels, and more. Do you see how quickly a decline in health affects our monetary and life expectancy projections?
The Factor of Investment
We already discussed how our couple has a $1 million portfolio of assets. Now, let's assume that this portfolio is going to grow by 4.5% during their retired years. I'm using this specific amount because bonds are currently at a 40 year high, and I don't believe they will offer investors the same returns as they have over the past ten years. They certainly won't offer anything like they did back in the 1980s when they reached their peak.
When bond interest rates hit these levels, it means that the bonds themselves will reach a new low. We're already 40 years into a bull market for bonds, so I have to consider that when projecting investment returns for my clients. Of course, I'm also looking at the stock market, which has enjoyed one of its greatest bull markets in history, starting in 2009.
So, 4.5% is a reasonable expected return for this couple over the 18 or 19 years they will be in retirement. Keep in mind that we're only projecting out to age 90, which is when their plan will either end or they will pass away.
Let's Talk Expenses
To review, we have a 71-year-old husband and a 69-year-old wife. We have a $500,000 home that they own outright with no mortgage, but which will not be used to fund their retirement plan. One of the spouses is receiving $1,500 a month from social security, and the other one is receiving $1,000 a month. They have a $1 million portfolio with 50% in a traditional IRA and 50% in after-tax, which could include brokerage accounts or Roth IRA. Going forward, we're going to assume a 4.5% annualized rate of return on their $1 million investment portfolio. Lastly, we're developing a plant intended to last until they reach age 90. That's a lot of data, but we still need to factor in the couple's living expenses. You see, in order for them to retire on a $1 million portfolio and not run out of money before they hit age 90, they need to adhere to a strict budget. In this case, my calculations tell me that they can reduce their chances of outliving their money by keeping their budget under $87,000 a year.
Now, that is a pretty significant budget for a retired couple to have, especially if they don't have a mortgage payment. This figure also assumes that they will still be able to live on that budget if it increases by 2.25% a year due to inflation - even if the stock market suffers tremendous crashes. In coming up with this figure, I performed an analysis on a variety of stock market scenarios, and $87,000 per year was enough to live until 90 without selling their home in every single case.
So, is $1 million enough for a couple to retire? Yes, It is.
A couple in a similar situation can easily, and hopefully happily, retire with a rather generous budget for vacations, medical expenses, car payments, car insurance, gifts to family members, food, and anything else. This $87,000 budget not only covers all living expenses but could conceivably cover all types of expenses that the couple might have in a given year. For example, if they go on a $10,000 vacation, that will leave them $77,000 to work with. That's pretty generous for a couple with only $2,500/month in social security income, right?
Now, if you'd like to set up a free, no-cost, and no-obligation retirement-ready success call with me, simply click the link below. In just 20 minutes, we can discuss your retirement goals and whether or not you're on the right financial path to meet them. I look forward to hearing from you!
Also I encourage you to watch my free retirement video: https://go.thirdactretirement.com/strategy