Back when your parents or grandparents were daydreaming about retirement, $1 million seemed like a magic number. That was then. Today, $1 million won’t get you very far during retirement.
One million dollars is no longer the magic number for retirees because it’s not the same value that it used to be. Since 1975, inflation as measured by the Consumer Price Index, has risen an average of more than 4 percent a year. One million today has the same buying power as $227,683.43 did 39 years ago, explains Michael Farr, president and CEO of wealth management firm Farr, Miller & Washington and author of A Million is Not Enough: How to Retire with the Money You’ll Need.
It’s more realistic to say that you should save around 10-12 times your current salary. If you make at least $100,000 that will give you between $1-$1.2 million and will allow you to have around $50,000 a year for 20-25 years when adjusted for inflation, says Farr.
If you’re still a skeptic and think $1 million is good enough, plenty of experts disagree.
The silent killer
Inflation erodes wealth. “When we need to crystallize the theory of inflation with clients, the examples of the cost of milk, postage or even a new car today versus when they started working usually results in an understanding that the value of $1 slowly erodes over time,” says Bradley Bofford, managing partner, Financial Principles.
In the current environment, Treasuries, CDs and savings account yields are at historic lows. If a conservative retiree hoped to live off of the interest from these vehicles, their income has steadily decreased over the last five years. In many cases, the retiree taps principal, resulting in a snowball effect of depleting assets.
Over the next 10 years, a 60% equity, 40% fixed income portfolio is projected to return 3.25%, says Nick Ventura, president of Ventura Wealth Management. On a $1 million portfolio, this hardly provides enough for the average family to live comfortably during retirement. For the average family, to generate a median retirement income of approximately $85,000, the nest egg should approach $2 million, says Ventura.
Depending on where the assets are invested, taxes can be another factor that will lower the net income from retirement assets. Additionally, says Bofford, there is a general consensus that tax rates will continue to increase, resulting in further erosion of wealth.
Forces beyond your control
Life is full of surprises. Many times, those equate to more money coming out of your pockets, points out Kevan Melchiorre, a private wealth advisor with Busey Wealth Management. Take for example a double whammy like market volatility and an illness that requires long term care. Suppose there was a bad year in the market, let’s say like 2008, when the market dropped 34%. That means if you began with $1 million and assumed you were going to take out 5% per year ($50,000), you could end up with only $693,000 to live off of, says Jonathan Gassman, of The Gassman Financial Group. Depending on the frequency of events (market returns) you could run out of money. “Compound that with a long term care event, which on Long Island can cost $150,000 a year – three years in, you are eating and living off Alpo.”
Know too that dependable income sources are a dying breed. Historically, Americans could rely on some type of pension or other defined benefit plan, along with Social Security to fund their retirement living expenses. This made it easier to maintain savings and not need those buckets for income, says Melchiorre. Consequently, you need more savings than ever to sustain your lifestyle.
“The good news is we are living longer. For some, the bad news is, we are living longer. If there isn’t enough accumulated retirement assets available because someone lived much longer than expected, then it can force the person to depend on someone to help with their income needs, as well as health care costs,” says Bofford. This scenario ends up affecting not only the person who poorly planned, but the person they now rely on. The reality is that while $1 million may be enough to retire, the question is, “how long will you be able to stay retired?” asks Andrew Carrillo, managing principal, Barnett Capital Advisors.
Realize math is fuzzy
Truth is, “There is no real number. Each person has their own NUMBER and it depends on their spending and their lifestyle,” says Gassman. The question is, “Do you know yours?”
Make a plan
The most important part of retirement planning is to have a plan. This includes taking a look at your current and expected sources of income and expenses to determine what your cash flow will look like during retirement and throughout your life expectancy, says Anthony Criscuolo, a certified financial planner with Palisades Hudson Financial Group.
As part of this process, establish your financial/retirement goals to determine how big a nest egg you need. “Knowing ‘your number’ is one of the most important aspects of your retirement plan, but before you can determine what your number is, you have to make a plan and establish your goals,” says Criscuolo.
If you want to get to whatever is your number, you’ll need strategy and discipline. “Don’t put your kids’ education expenses before your retirement needs. Many parents sacrifice earlier retirement or a comfortable retirement to foot the bill for their child’s college expenses or children of the ‘boomerang’ generation living at home well into their late 20s,” says Ventura.
Consider using a heavier equity balance in your retirement portfolio. “Having exposure to growth vehicles during retirement may add volatility, but it may also allow for a higher rate of return. This may permit higher income off of a lower starting investment base,” says Ventura.
Save more. “Trim $300-$500 a month in expenses that can be put away for later use, rather than on luxury items now,” says Farr. Contribute to retirement accounts as early as possible and in a tax efficient way, says David Richmond, president of Richmond Brothers.
Purchase long term care insurance. Says Ventura, “The biggest hazard to retirement success is maintaining two households at the same time. This happens when both spouses are alive, but one must go into an assisted living facility. Having insurance to help mitigate these costs can help both spouses be more comfortable in a trying time.”