Friday, June 13, 2008

Is $1 Million Needed To Retire?

Is $1 Million Enough to Retire On? by Emily Brandon from U.S. News & World Report shares the opinions of three experts. Michael Farr votes no (for most people), Mauricio Soto says yes for people with annual incomes below $120,000 per year, and Jonathan Pond says definitely, since many people only need $100,000 t0 $200,000 plus social security. So what's the right answer?

As the article points out, it depends on the specific situation of an individual. There is no one right answer. Here are the key factors I believe affect the answer:

  1. Satisfaction with current lifestyle. If one is happy with the pre-retirement lifestyle, then it is easy to calculate the inflation adjusted cost to maintain the current lifestyle. Many people I know have growing incomes and continue to increase their lifestyle costs, e.g. new cars, bigger homes, entertainment. In such cases, it is hard to calculate what is really needed in retirement.

  2. Retirement age. Those that retire at 62 or later can choose to file for social security payments. Retiring before 62 requires sufficient savings to cover the gap from not being able to collect social security.

  3. Amount of debt. Having debt in retirement can significantly increase the savings needed. To minimizes monthly expenses, it's best to be debt free.

  4. Life expectancy. While the above three factors can be controlled, life expectancy is relatively uncertain, but may have the biggest impact. If one only lives a year after retirement, very little savings is needed. However, if one lives until 100 significantly more funds are needed.

In our case, we our answers were: 1. yes; 2. forties; 3. only a mortgage; and 4. nineties. Based on our specifics, we calculated that we needed save 20 times our pre-retirement salary to be reasonably certain of having sufficient funds. However, if I retired later or could get social security, the number might be reduced to between 12 and 16 times salary.

How much I need to retire depends on our salary. If I hypothetically made $50,000, I would want $1 million in order to retire in my forties. If I were planning to retire at 67, I would want to have $600,000 since social security payments could cover some of our expenses. However, if I were earning $100,000, the savings needed would be $2 million to retire in forties and $1.2 million to retire at 67.

Of course, I strongly recommend consulting with a financial professional when evaluating the options. It was very helpful to have a third party confirm our analysis before we proceeded with retiring in our forties.

For more on Reaping the Rewards , check back every Friday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

1 comment:

Dave Shafer said...

What about 40+ years of inflation?