Is A Million Bucks Enough To Retire?

“Wow, those guys must be millionaires!” I can recall uttering those words as a child, driving by the nicest house in our neighborhood—you know, the one with four garage bays filled with cars from Europe.

The innocent presumption, of course, was that our neighbors’ visible affluence was an expression of apparent financial independence, and that $1 million would certainly be enough to qualify as Enough.

Now, as an adult—and especially as a financial planner—I’m more aware of a few million-dollar realities:

Retirement Stress Test Graphic - v3-01

1)   Visible affluence doesn’t necessarily equate to actual wealth.  Thomas Stanley and William Danko, in their fascinating behavioral finance book, The Millionaire Next Door, surprised many of us with their research suggesting that visible affluence may actually be a sign of lesser net worth, with the average American millionaire exhibiting surprisingly few outward displays of wealth. Big hat, no cattle.

2)   A million dollars ain’t what it used to be. In 1984, a million bucks would have felt like about $2.4 million in today’s dollars. But while it’s quite possible that our neighbors were genuinely wealthy—financially independent, even—I doubt they had just barely crossed the seven-digit threshold, comfortably maintaining their apparent standard of living. To do so comfortably would likely take more than a million, even in the ’80s.

3)   Wealth is one of the most relative, misused terms in the world.  Relatively speaking, if you’re reading this article, you’re already among the world’s most wealthy, simply because you have a device capable of reading it. Most of the world’s inhabitants don’t have a car, much less two. But even among those blessed to have enough money to require help managing it, I have clients who are comfortably retired on half a million and millionaires who need to quadruple their nest egg in order to retire with their current standard of living.

The teacher couple, trained by reality to live frugally most of their lives, don’t even dip into their $400,000 retirement nest egg or their $250,000 home equity because they have two pensions and Social Security that more than covers their income needs.  Their retirement savings is just a bonus.

But the lawyer couple, trained by reality to live a more visibly wealthy existence, aren’t even close to retiring with their million-dollar retirement savings. In order to be comfortable, they’ll need to have at least $4 million.

A million bucks, then, may be more than enough for some and woefully insufficient for others.

A Simple Retirement Stress Test

A simple way to conduct a retirement stress test is to apply some elementary school math:

Expected Annual Pension Income              _______________

Expected Annual Social Security                _______________

Retirement Savings _______________        

X .04 (4% withdrawal rate)                        +_______________

TOTAL EXPECTED ANNUAL INCOME =     _______________

If your total expected annual income is more than your expected income needs, you passed the retirement stress test. If you didn’t, you’ve got more work to do. While your catch-up method will be based on your specific situation, there are really only two basic ways to improve your retirement readiness:

1)   Increase your retirement income. As little as some want to hear it, working longer has a really powerful impact because you may be able to strengthen each of the three legs of the retirement stool—or at least two of them, if you don’t have a pension.

2)   Decrease your retirement expenses. No one wants to retire and then live like a pauper, so decreasing spending is typically even more unpopular than working longer, but it need not be. If you’re willing to alter your geography and go on an adventure, moving from an area with a higher cost of living to a lower one can transform a seemingly hopeless scenario into one that is more than comfortable. This is especially true when you’re able to buy a comparable house for less and add the proceeds to your retirement nest egg.           

Conclusion

The million-dollar retirement goal gets a lot of attention. Remember, though, that personal finance is more personal than it is finance.  Seeing one’s nest egg add another decimal place on the calculator may satisfy an emotional need, but there’s really no magic to it. A million is more than enough for some while lacking for others. The better question: What number works for you?

If you enjoyed this post, please let me know on Twitter@TimMaurer.

The financial industry has a reputation for being an "old boys club," known for paternalism and the marginalization of women.  Unfortunately, there's a lot of truth to it.  I enjoyed talking to Kim Palmer at U.S. News and World Report in preparation for her article, Where Are The Female Financial Planners?

Women financial advisors

Date: June 4, 2014
Appearance: Where Are The Female Financial Planners?
Outlet: U.S. News & World Report
Format: Other

The Scarcity Fallacy: Is Less Really More?

Having the privilege of walking through life with people vocationally, aiding in the acquisition, maintenance and dispossession of earthly resources as a financial advisor, I’m burdened with a heightened sense of the battling spirits of scarcity and abundance.

The dehumanizing poverty that torments the Majority World screams that resources—here and now—are scarce. Remembering when I handed a bowl of vitamin-charged oatmeal to a boy who lives and breathes in La Chureca, the Nicaraguan squatter town subsisting off of Managua’s trash, I occasionally twinge at my willingness to pay $5 for a cup of premium Central American coffee. That expenditure could buy a week’s worth of mush, keeping children of the dump alive.

This is one of the children at the feeding center in "La Chureca," the city dump in Managua, Nicaragua.

This is one of the children at the feeding center in "La Chureca," the city dump in Managua, Nicaragua.

How could I not consume less?

And share more?

Why Beating The Market Is An Uphill Skate

It is absolutely possible to beat the market, just as I’m sure it’s possible that someone could climb Mt. Everest in a pair of roller skates.

Mt._Everest_from_Gokyo_Ri_November_5,_2012

It is so improbable, however, that it’s rendered a fruitless, if not counterproductive, pursuit.

After 16 years in the financial industry and seeing countless great investors eventually humbled by market forces they could not control, I’ve finally relinquished my skates.

What You Can Learn From Bill Gross And PIMCO’s Troubles

“Trouble. Trouble, trouble, trouble, trouble.” Reading all the news about Bill Gross and PIMCO, I keep hearing that Ray LaMontagne song in my head. (Go ahead—give it a listen while you read this, just for fun.)

EGO

The king of bonds isn’t yet abdicating the throne, but it’s been a rough stretch since PIMCO came down from the mountain to translate the etchings on the “New Normal” tablets. It was, of course, hard to argue the logic in 2009, that U.S. markets would struggle under the weight of a sluggish economy hampered by high unemployment and systemic government debt. But as it often does in the face of supposed certainty, the market defied man’s expectations.

Allocating Your Most Valuable Asset—You

What is your most valuable asset? Your home? Not likely, even back in 2006. Your 401(k)? Doubtful, even when it was 2007. No, if you’re not yet glimpsing your retirement years, it’s likely that your biggest asset is you—and not just metaphorically.

Tim_01

Let’s say you’re only 30, with a degree or two and some experience under your belt. You’re making $70,000 per year. If you only get 3% cost-of-living-adjustment raises, you will crest a million in aggregate earnings in just the next 13 years.

Over the course of the next 40 years, over which you’ll almost surely continue working, you’ll earn more than $5.2 million.

Survey Shows Students Are Dumping Top Colleges Due To High Cost

The disproportionate rise in the cost of college relative to the cost of everything else is not news, but a new survey shows that college students are dumping their top choices for education based on price. Have we finally reached the tipping point?

800px-College_graduate_students

Well, I’m a planner—not a prognosticator—so I’ll defer judgment to those with functioning crystal balls, but let’s address the college cost crisis and a way to avoid becoming the next student or parent squashed by education overpayment.

Is there really a crisis?

The Chances Are Good That Your 401(k) Isn’t

We need not look far to learn that 401(k) plans are imperfect or worse, so instead of lumping on more criticism about how you and your employer have botched your 401(k), let’s discuss how to make the most of a not-so-great situation.

401k-Plan-300x246

 

Step 1: Don’t blame shift. There is a time for criticism, so keep reading, but too many people use the imperfections in, or a lack of understanding of, their retirement plan to feed the self-deceptive siren’s call to inaction.