One Million Dollars

I have bad news, a million dollars is not a lot of money. Let me rephrase that, a million dollars is not worth as much as it used to be. In the context of saving for a 30-year retirement, a million dollars won’t be enough. It all depends on how much you need to withdraw each year. Retirees with pensions or other income sources could get by with less, but for the majority of us relying solely on Social Security and savings, a million dollars isn’t going to cut it.

Taking a over-simplified version of a financial plan, a so-called “safe withdrawal rate” for your retirement portfolio is rumored to be 4%. On a million dollar portfolio, that’s $40,000/year. But if any part of your savings is in tax deferred accounts such as 401(k)s or traditional IRAs, you will owe income tax on that withdrawal. Assuming it’s all taxable, that leaves between $26,800 – $35,200 after-tax, depending on your tax rate.

Social Security payments for today’s retirees range from $1,500 – $2,600/month. (payments can be lower depending on work and earnings history). Taking a mid-range estimate and a non-working spouse receiving a one-half spousal payment, that is $3,075/month from Social Security before Medicare deductions and taxes. Adding together portfolio withdrawals and Social Security, on the high side this couple will be living on $5,300 – $6,000/month. Can you live on that?

If you live in a low cost area, own a home with no mortgage, and can expect low out-of-pocket medical expenses, then a million dollars may be enough for you. But there is very little breathing room for the rising cost of living from inflation. And don’t even think about taking your grandchildren on vacation or helping your adult children with a down payment on a home. A couple of down years in the stock market, and you’re looking over the edge of a scary cliff.

Inflation is the enemy of a lengthy retirement. The chart below shows how many years it takes for inflation to cut your money in half at different rates. I like to rephrase this as the number of years it takes for your expenses to double in retirement. Inflation has been historically low (2% or less) for the better part of a decade. It would not be unusual to see inflation return to the long-term average of 3% or higher. 

The media loves to print statistics on the number of millionaires in the U.S. and other countries. Headlines like, “U.S. mints 700,000 new millionaires last year” are common internet clickbait. It’s time to move that needle because a single million dollars is no longer the mark of wealth. Retirees with a million dollars are squeaking out a comfortable retirement.

Keep in mind that a 25-year-old who starts maxing out a 401(k) today, receives a 4% company match, and earns 6% over a 42 year working career will accumulate $4,000,000. Even though the needle is moving higher, today’s young savers are starting from a higher base salary than today’s retirees. Keeping these numbers in perspective makes saving for retirement a less daunting task.

Postscript: The stark reality is that many Americans live paycheck to paycheck and have very little savings. Since this post is tone deaf to this problem, I wanted to acknowledge it. The United Way has studied the plight of Americans who are Asset Limited Income Restrained Employed (ALICE). Almost half of Louisianians are considering ALICE or below the poverty line. To learn more about the ALICE project and find out the statistics in your are click here.

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