A 32-year-old American millennial planning to retire at 67 with $1 million would live below the poverty line!
A cool $1 million has long been considered the gold standard of retirement savings. These days, it’s only a fraction of what you will really need.
For instance, a 67-year-old baby boomer retiring now with $1 million in the bank will generate $40,000 a year to live on adjusted for inflation and assuming a sustainable withdrawal rate of 4 percent, said Mark Avallone, president of Potomac Wealth Advisors and author of “Countdown to Financial Freedom.”
It’s worse for a 42-year-old Gen Xer, whose $1 million at retirement will only generate an inflation-adjusted $19,000 a year when all is said and done. And a 32-year-old millennial planning to retire at 67 with $1 million would live below the poverty line.
That’s what Avallone, a certified financial planner, calls “million-dollar poverty.”
People have to self-fund their retirement, and the enormity of that challenge is underestimated.
Mark Avallone |PRESIDENT OF POTOMAC WEALTH ADVISORS
For most Americans, there’s been a serious lack of proper investment income and planning, Avallone said. That, coupled with inflation, a looming pension crisis and longer life expectancy, is “a toxic formula for successful retirement,” he said — one that will result in a dramatic drop-off in lifestyle for retirees.
“Today’s generation of working people grew up in an era where their parents went to a mailbox, and a check appeared. But pensions are almost extinct,” Avallone said. “People have to self-fund their retirement, and the enormity of that challenge is underestimated.”
What even more concerning is that this statement was in 4 years ago, 2017.
GoBankingRates conducted a study in 2017 to determine how long a nest egg of $1 million would really last. The personal finance site compared average expenses for people age 65 and older, including groceries, housing, utilities, transportation and health care.
Naturally, depending on where in the U.S. you live, the longevity of a $1 million nest egg varies. Those dollars stretched furthest in states like Mississippi, Arkansas and Tennessee, where retirees could live a life of leisure for at least a quarter of a century.
However, in Hawaii, where residents pay roughly 30 percent more for household items across the board, that same amount will only get you just shy of a dozen years — largely because of that higher cost of living and pricey real estate.
Considering that many families spend more than 100 percent of their income after taxes on monthly expenses alone, there are only two ways to overcome million-dollar poverty, Avallone said: Earn more or spend less.
For those nearing retirement, Avallone suggests getting a side gig, or “hobby job,” and then saving 100 percent of that income.
“The key is to automatically deposit that money in a savings or investment account,” he said.
Alternatively, take a hard look at your expenses and differentiate between what’s necessary and what’s discretionary. Then identify expenditures that can be cut back — which involves making some very tough decisions.
“Some are small, like lunches, but they add up,” he said. “Others are big, like private school.”
Is $1 Million Enough to Retire? Factors to Consider
How long will a million dollars last in retirement depends on the following factors:
- Geography: Costs can differ dramatically throughout the country, and where you live could determine whether you can successfully retire with $1 million. The financial technology company SmartAsset found retirees in New York City would deplete $1 million in 10.21 years, while the cash would last 32.26 years in McAllen, Texas.
- · Longevity: While no one knows exactly how long they will live, people can make an educated guess based on their health and family history. Those who might live well into their 80s, 90s and beyond may find $1 million isn’t enough.
- · Lifestyle: Retirees need to make smart spending choices, and those who choose an expensive lifestyle will need more cash in their nest egg. “I’ve got clients with $10 million who spend like crazy and probably aren’t going to make it 25 years,” says Brian Walsh, a financial planner with Walsh & Nicholson Financial Group in Wayne, Pennsylvania.
- · Health care: The 2021 Fidelity Retiree Health Care Cost Estimate found an average couple retiring this year can expect to spend $300,000 on health care costs in retirement. Healthy seniors may have lower expenses and find that helps their retirement savings last longer.
- · Retirement income: Most people won’t be living exclusively off their savings in retirement. Even those who don’t receive a pension can expect Social Security income. Those payments will reduce the amount withdrawn from retirement accounts.
- · Investment risk: Retirees also need to take a close look at their portfolio if they want to know the answer of how long will $1 million last in retirement. “Market instability can take a bite out of assets,” says Rafael Rubio, president of Stable Retirement Planners in Southfield, Michigan. Investing aggressively puts money at risk for losses, but being too conservative can mean savings don’t grow enough to offset inflation and withdrawals.
- · Inflation: While inflation has been near zero in recent years, there is no guarantee of that continuing. A rising inflation rate will erode the purchasing power of money and result in retirees burning through their savings faster more quickly.
All these factors make it difficult to create a universal rule of thumb for retirement savings. While some people may be able to live comfortably in retirement on less than $1 million, others will need significantly more.
How to Determine the Right Amount to Retire on for You
Rather than rely on a rule of thumb to determine how much to save for retirement, financial planners advocate for a more nuanced approach. “It’s really taking a step back and taking a holistic view,” says Andrew Rosen, a certified financial planner and president of Diversified Lifelong Advisors in Wilmington, Delaware.
That means taking the following steps to determine how much to save for retirement:
Estimate guaranteed retirement income from sources such as Social Security and pensions.
Calculate expected expenses based on debt and lifestyle choices.
Determine any shortfall that will need to be covered by retirement savings.
“The most common mistake I see is that (people) underestimate the cost to be them,” Rosen says. In other words, people don’t fully account for all their spending. They may total their monthly bills but ignore all the smaller items – such as gifts, vacations, travel and home décor – which can quickly add up.
How much people plan to withdraw from retirement funds each year should also factor into setting retirement savings goals. “The old rule of thumb was always 4% (withdrawals),” Rubio says. Four percent of $1 million provides $40,000 each year for retirement spending. If you can’t imagine living off $40,000 a year plus Social Security, it’s time to reconsider your savings goal.
If all this feels overwhelming and confusing, find a financial professional who specializes in retirement planning. They have both the experience and software to make calculations on behalf of clients.