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Reality of a Million-Dollar Retirement

Retiring on a million dollars. The idea may evoke images of lavish retirement homes or luxurious travel. But let’s take a closer look at the real lifestyle that $1 million of retirement savings will afford.

It’s reasonable to assume a long-term real return, after adjusting for inflation, of 2% on a diversified investment portfolio. At that rate, $1 million would provide an annual income of $44,650 for 30 years. This leaves no cushion for emergencies or increased living expenses beyond inflation. It also leaves nothing after 30 years to pass on to heirs.

If you are single and age 65 with $1 million, you should be okay for 30 years. But what if you are married? While the adage “two can live as cheaply as one” has some relevance when it comes to housing, it doesn’t apply to food, clothing, transportation, health care, or entertainment.

If a third of our cost of living is housing, it would be reasonable to conclude a couple would need an income of around $75,000 to enjoy the same lifestyle as a single person living on $45,000. A couple with $1 million, then, only has 16 years of retirement income. If they retire at age 65, that only assures both of them enough money until age 81. That means a high probability at least one spouse will run out of money in their later years. This does not pass for good financial planning.

And how about a couple that, much more typically, has saved less than $1 million? On a portfolio of $500,000, they would run out of money in eight years.

How can the average baby boomer, who hasn’t saved $1 million or more, have a decent standard of living in retirement? It requires thinking out of the box. Here are just a few possibilities:

1. Retire later. If you are able to keep working past 65 or 66, even two or three more years of earnings can make a big difference in your retirement lifestyle.

2. Downsize earlier. Look at whether reducing housing costs before retirement can free up additional monies to invest and help stretch your retirement nest egg.

3. Make conscious choices about where to retire. An income of $44,650 might give one person a reasonable standard of living in many areas of the US. However, it won’t provide much of a lifestyle in New York City or Washington, D.C.

Retiring outside the US can make an even bigger difference. For example, many people in Rapid City retire to a warmer climate like Arizona. According to a November 9, 2017, article in International Living, the average cost of living in Phoenix, AZ, is $44,843 per person. But a couple retiring to Boquete, Panama, could rent a furnished two-bedroom apartment and pay for healthcare, entertainment, groceries, utilities, and transportation on $20,322 a year. Boquete is a small town in the highlands which International Living describes as “a retirement haven for expats looking for a simpler lifestyle” where “English is commonly spoken.”

The impact of this reduction in living expenses is staggering. If you have $1 million you can afford trips back to the US to see family, will have plenty of cushion for emergencies, and can leave something to your heirs. That’s something you can’t obtain even as a single in the US on $1 million. If you have $500,000, living in Panama will give a couple 35 years of income; $400,000 is good for 26 years, and even $300,000 gets the two of you 18 years.

Not everyone would want to consider international retirement. Everyone, however, would be wise to consider the reality of what income their retirement nest egg can provide.

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3 Responses to Reality of a Million-Dollar Retirement

  1. Ryan Igleheart April 3, 2018 at 11:16 am #

    Mr Kahler- In response to this blog post, which also appeared as an article in the paper (and on the web), I would like to share my thoughts about what you’re telling people. With all due respect, you seem to be using the extreme outliers in every case, from cost of living to expected portfolio returns. Something doesn’t add up. Let’s dig in:
    • You indicates that a couple likely can’t live on less than $75K a year. But the average family income for a family of 2 in the US is roughly $58K. Those average people are not homeless and starving. And average incomes for Rapid City and SD are lower than US averages. Hmmmm…
    • You completely ignores Social Security! You talk about the $1M portfolio, but if a couple works enough to save $1M, then they will obviously be qualifying for Social Security. A quick glance at the most basic calculator on the SS site will tell someone that even assuming a career starts at ~4K annual salary 35-40 years ago and works their way up to $50K at retirement, they would expect to recieve $1,774 if they took SS when they turn 70, which equates to $21,288/year the first year. Remember- that’s just for one person, so it assumes the other spouse never worked enough to qualify for SS. That $21K/year goes a long way toward helping this couple, and you don’t outlive it and it adjusts with inflation.

    • Also, you assumes that 100% of housing costs persist in retirement. However, over 63% of Americans own their home and most will have paid it off by the time they retire.

    • You assume that ALL non-housing expenses are doubled if you are a couple. Gas wouldn’t be doubled if they take a trip to the store or to see family. Speaking of transportation, two retired people can relatively eaily share a single car. They don’t pay any more to heat/cool the house than they do if one person lived there. Bottom line, you take very liberal assumptions with what it costs to live in retirement. especially, once again, for Rapid City, SD)

    • Finally, you assume a real growth rate of only 2% over a period of retirement and claim that spending 4.4% not indexed to inflation would have you run out of money and leave nothing to heirs. But the Trinity study that spawned the 4% Safe Withdrawl Rate rule of thumb was designed to look at the VERY WORST periods of market returns and help ensure that someone did not run out of funds within 30 years. You know what happened at the end of the vast majority of those 30-year periods? They had more money than when they started due to investment returns outpacing withdrawals. Not guaranteed, of course, and future returns could be lower than past, but also not likely the doomsday scenario the author paints.

    Now, disclaimer: a million dollars is not what it used to be and true, Americans are pretty poor at saving and planning ahead. But it feels like a shame for a financial professional to send a message to people that they shouldn’t expect to survive on less than $75,000 a year, or if they do not have a million dollars saved up, they will be broke in 8 years-16 years. There’s a lot of middle ground, and with realistic but conservative assumptions people can find their most appropriate retirment path without feeling as if the sky is falling and they need to move abroad.

    • Rick Kahler April 9, 2018 at 11:47 am #

      Mr. Igleheart,

      Thank you for your thoughts. I agree with many of them and most of the others are misunderstandings that can be cleared up with some additional information.

      •In the article I didn’t say a couple can’t expect to survive on less than $75k. I did say a couple would need an income of $75,000 to equal the lifestyle of a single person living on $45,000. What I didn’t say in this column, that I have written about in the past, is that a plethora of research on happiness suggest that there is a relationship between money and happiness up to a household income of $75,000. When working with a couple that doesn’t have a retirement income in mind, I usually start with $75,000.
      •Yes, incomes for South Dakota are lower than the national average, and so are the costs of living. The lowest income to produce happiness is $65,850 in Mississippi and the highest is $122,125 in Hawaii. For South Dakota the income needed for happiness is $73,725. An income of $73,725 in New York City (as opposed to New York State) buys about 60% of what is does in Rapid City.
      •You are also absolutely correct that I ignored social security. It would have been less confusing to point out a single person with a million dollars producing $45,000 plus their social security would be in far better shape on the happiness scale than a couple who would absolutely need their social security checks to get to the $75,000 happiness income.
      •Indeed, I did not tackle the timing of a house payment. This is a very subjective variable that would be very hard to treat in the 600 words I have available in a column! Some people enter retirement with a paid for home and others still have a mortgage payment well into retirement.
      •I did assume all other expenses doubled and that gasoline costs would not double if the couple rode in the same car. I will have to disagree that “two retired people can relatively eaily [sic] share a single car.” Maybe in New York City, but that doesn’t work in Rapid City!
      •I used a real growth rate (defined as after inflation) of 2%. I looked for where I claimed “that spending 4.4% not indexed to inflation would have [a couple] run out of money and leave nothing to heirs,” or referenced the 4% withdrawal rate rule developed by William Baingan, but I couldn’t find such a number or statement in my article. Perhaps you are confusing it with another? By using a 2% real rate of return, it allows the $45,000 of income to adjust for inflation whether inflation is 1% or 10% and still paint a true picture.
      •I agree that “…a million dollars is not what it used to be and true, Americans are pretty poor at saving and planning ahead.”

      Thanks again for your comments. I hope my reply is helpful to you in clarifying some of the points in the article.

  2. John W. April 11, 2018 at 10:36 am #

    We need to start educating children throughout their education on the importance of saving and investing. If I had known anything about investing, I’d easily have had several million dollars save by my full retirement age. I didn’t start saving and investing until I was 34 and had my first job with a 401K plan. I’ve done OK, I’ve got about 1.6 million dollars saved in the last 30 years. I just think of how much time and money I wasted before my first 34 years of life.