Can You Retire With a Million Dollars?
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FacebookI recently received an e-mail from a reader who is frustrated by their lack of progress when it comes to retirement savings. In short, they thought it unlikely that they’d ever be able save more than a million dollars, if that. Would they still be able to retire?
The short answer is that yes, as long as you’re careful with your money, you should be able to retire on a million dollars, or even less. What follows are some things to consider when evaluating how much you’ll need to retire.
Consider the income generated
If you take the 4% safe withdrawal rate as a rule of thumb, your $1M nest egg will generate an inflation-adjusted $40k in annual income.
Of course, the reliability of that 4% rule depends on a lot of things, such as time horizon, the composition and expected performance of your investment portfolio, whether or not you retire into a collapsing stock market, etc.
If you’re not comfortable with that number, feel free to use your own. The point here is that $1M can generate a considerable amount of investment income.
Consider your expenses
It’s commonly said that your expenses will go down in retirement. For example, if you own a house, you’ll hopefully have paid it off before you reach retirement age, so that’s typically a major savings over having a monthly mortgage payment.
Similarly, you’ll no longer have a number of work related expenses, such as dressing for and commuting to work. Another work-related “expense” that will go away is that you’ll no longer be saving for retirement. Also, unless you retire very young, you most likely won’t have child-rearing expenses when you retire.
Of course, there are some areas in which your expenses might increase (e..g., travel, healthcare, etc.) so be sure to factor those things in when running the numbers.
What about health insurance?
This is a potentially big one. While some retirees have health insurance through their former employer, many don’t. In the future, I’d bet even fewer retirees will have access to such benefits. Of course, the healthcare landscape is changing in this country, so your needs in this area might also change.
Despite these unknowns, I think it’s safe to say that the high cost of health insurance will be especially problematic for young retirees, as they’ll have a long ways to go before they’re eligible for Medicare.
Tax considerations
Another important factor is taxes. The structure of your investment portfolio will play an important role in determining your income in retirement. If you’ve saved primarily in Roth accounts, your money will come out free of income taxes. That’s huge.
If, on the other hand, you’ve saved in a traditional 401(k) or IRA, you’ll owe income taxes on your distributions. The good news here is that you’ll likely be in a lower tax bracket at retirement. The bad news is that even the lower tax brackets might have tax rates in the future.
Consider the effects of inflation
While the 4% safe withdrawal rate gives you an “inflation-adjusted” 4% of your initial portfolio value in income per year, this doesn’t account for the fact that $1M at retirement age will be worth much less than it is today.
In other words, if I gave you had $1M in your pocket today, you’d be in a much better position than if you had $1M in your pocket 30 years from now. This is simply due to the devaluing effects of inflation.
Consider this: After 30 years of relatively tame inflation (3% per year) the purchasing power of $1.00 will be roughly $0.40. This is exactly why people say that “a million bucks ain’t what it used to be.”
Consider other sources of income
Of course, another important consideration is whether or not you’ll have any alternate sources of income. For example, my parents retired with a much smaller nest egg because most of my dad’s retirement savings throughout his career went into a generous pension plan that now covers their living expenses.
In fact, in most years, they take the required minimum distribution (RMD) from their other IRAs simply because they have to. They then invest that money elsewhere because they don’t need need it on a daily basis.
Your thoughts
How much money you’ll need in retirement is a complex topic. I’ve given you some issues to think about above, but I’ve undoubtedly missed some things. Do you have anything to add?
Published on December 21st, 2009 - 16 Comments
Filed under: Retirement, Saving & Investing
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About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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16 Responses to “Can You Retire With a Million Dollars?”
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December 21st, 2009 at 9:19 am
Are you able to retire with a $1 million is a great question. This is a question many of us have. You answered the basics but it really will depend on the type of lifestyle you want to live in retirement. The key is not amount of money you have its the cashflow that you will have in retirement. You want enough cashflow to cover your expenses. This cashflow can be come from various sources such as saving, pension, or real estate holdings. Nice post.
December 21st, 2009 at 9:21 am
Yes, I absolutely agree. The question isn’t really can you retire on $X, but would you be willing to retire on $X given the accompanying lifestyle.
December 21st, 2009 at 11:14 am
Will $1M be enough for me to retire?! Yes, it will! (Assuming that my wife also has $1M.)
Fortunately, I:
1. am learning to live frugally,
2. am maintaining a somewhat healthy lifestyle (less medical bills when I’m older, I hope),
3. hope to be debt-free during retirement,
4. will likely have a part-time job in retirement,
December 21st, 2009 at 1:11 pm
Being younger and just getting started with my retirement contributions it is difficult to see how I could possibly save up for that much. It’s so far down the road and have no idea how taxes and expenses will grow over time.
December 21st, 2009 at 1:35 pm
This is a good article that gives you a lot to think about. Anybody CAN retire if they have a million dollars. But, the better question to ask is “Are you WILLING to retire on a million dollars?” As you point out, the safe withdrawal rate is only $40k. Are you willing to live off that amount?
When you are in your forties, you could well be at or near the million dollar mark. You could take an early retirement with that amount. But I have learned that when you start to approach one goal, it is human nature to start setting up a higher goal for yourself rather than rest on your laurels.
December 21st, 2009 at 4:01 pm
Half a million dollars is enough (at any age) if you’re willing to have a more frugal lifestyle.
Best would be to move to a nice non-first-world country – better bang for the buck, and usually healthcare will be cheap, even if you fully pay it out-of-pocket (U.S. has unbeatable huge prices for healthcare, thanks to our politicians).
December 21st, 2009 at 4:19 pm
Being that I’m only 25, I have a different mindset but if I were nearing retirement I would be worried too about having enough to last.
December 21st, 2009 at 5:20 pm
Great post! I’ve often wondered if… 1 million was enough to retire on, if I could ever get to 1 million by retirement, and what I really needed to earn to support myself and my potential husband in retirement. He’s 27 and hasn’t saved a dime in a retirement account, and I’ve only contributed to the max Roth IRA each year… just $14k in my retirement account as of today. 1 million seems so very far away and almost impossible, and it’s really scary that 1 million won’t really be enough to retire on. I’m very worried about it. THanks for this post.
December 21st, 2009 at 10:42 pm
nickle, you covered it well.
You only touch on the big question of when does the retirement begins. 1M today vs 30 years from now are two different things. Assuming we are not moving to a third would country there is no way 1M is going to cover 25-30 years of retirement if you start 30 years from now.
Not long ago I saw a statistic that suggested a retiree will spend, out of pocket, over $600 for medical in their retirement (30yrs).
To bad we can’t be Craig and do it all over again with what we know now!
December 21st, 2009 at 11:32 pm
Health insurance really is the kicker – my folks retired on something more than a million – and then the stock market crashed and the amount they could pull from their investments went down to zero, basically.
But they had planned to live on their income (pension & covered health care) anyway, so they’re OK.
My in-laws, on the other hand, are facing possible forced early retirement with no health insurance and a significant gap before medicare kicks in…they may end up blowing through their savings before they hit “retirement” age, if they’re unlucky – if the company goes under, if they can’t find new jobs, if they get hit with cancer or serious heart disease, they’re going to be living in our spare room in their old age.
December 29th, 2009 at 11:30 am
Everyone I know basically:
* works till they die
* works till they medically can’t work any longer and end up on Medicare/Medicaid — then they die
I’m seriously questioning whether I’ll ever be able to retire in the sense that people think of retirement: one long vacation, with trips seeing the world, etc.
Do any of you honestly know any ‘working joe’ who has successfully retired?
December 31st, 2009 at 10:22 pm
I’ve figured this one out myself. No, I couldn’t retire on a million dollars. I could retire on five million, however. And I don’t need a lot of fancy stuff either, but my living quarters would be paramount over everything. After that and my $10,000 Falcon Northwest super computer, life would be a dream.
January 20th, 2010 at 12:43 pm
Although I agree with much of your article, the reality is that the vast majority have less than $250,000 at retirement (approximately 3 to 5% of Americans are millionaires). Surprisingly, many surveys reveal a high level of happiness among our seniors. I doubt very seriously 25 years from now your will see a significant increase in the number of millionaires (making minimal adjustments for inflation).
April 16th, 2010 at 9:37 am
Is this for one person or a couple? How different should the goals be for a married couple vs a single person? Thanks
April 19th, 2010 at 4:42 pm
A million dollars will be worth how much down the road? It reminds me of a former pro baseball player who said his wife made him a millionaire. When he married the young lady he had three million and a couple years later he had one million.
May 31st, 2010 at 11:42 am
Well, this is an interesting question and I have been pondering this too. 1 million isn’t a lot of money considering the volatility and the nature of present equity/bond markets. However, fundementally what you would need is actually about 3 million dollars to comfortably retire, have passive income generation and be still capable of doing debt-financed investing. In principle you do this on 1 million dollars but as it was addressed earlier on in the comments not many people can live on 40k a year unless you have a drastic reduction in quality/style in life. So, how would you actually make 1 million become 2 million in the shortest way.
There is no simple way. I looked at equity but basically the markets get trashed everytime there is a new “great depression”. you lose your base value by 30-50% or more so even if your portfolio is earning 8% p.a. you could end up earning 8% p.a. on 50% of your principal value which is not really ideal.
Bond markets – basically with the soverign debt going totally out of whack, you are probably going to see a full-on blood bath. None of the “developed economies” monatary policy makes sense. I remember that I was taught that creation of credit are fundementally wrong if not managed carefully. What is happening in the EU right now is a Debt bubble which is actually in turn creating more credit into the net system (even if its not printing money). The US is bankrupt but no other nation has any idea what to do and are too scared to see the consequences of letting the US collapse, consequently everyone feeds the debt. Absolutely crazy, and once the Euro goes down which is a matter of time… the US dollar will go down and that would mean recession part 2. So do you really want to invest now?
Well, if equity and bonds are out of the question so where do i park my money so that i can get a reasonable yield without too much adverse risk.
I looked at it over and over again and each time it leads back to property. Yes, property too has it risks but fundementally you will always need a house to stay in. The key is not to follow the herd. Just invest with in your means to get 8% roi and if you can leverage it against a mortagage the better it is but NEVER mortagage more than 75% of the rental property. Reason being… if the market really crashs the at least you have 25% buffer before the bank forecloses on you. But normally the bank will not foreclose on a person who pays the bills as they dont want to take a property as the responsibility of earnings fall on them. So the key is dont follow the herd! Then leverage max 75%. Then when you have the opportunity to sell at 10-20% total value = SELL!! Then your base value will always increase. keep doing this till you have enough houses fully paid off but you always have to have some leveraged risk so that you are not going to just throw your money away.
2 things to remember:-
1. Never over-leverage! Never! If you dont have the initial money dont invest in property (i.e 30% of total value). You need the cash to weather a storm so 10% will always be liquid. Most people fail in property due to over-leverage.
2. Never listen to Realestate brokers. They make a living out of selling you property, they are not your friends. Unless, you are related by blood or you have some really sensetive pictures of him/her… keep your guard up.
well, thats my 2-cents worth of opinion.