“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:
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.
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?