Sunday, November 12, 2017

Is $1 Million Enough to Retire?

Mark Ganchiff, CFP®
Author position
Financial Planner

Being a millionaire is not what it used to be. Quaint 20th century Hollywood portrayals of millionaires bringing dinosaurs back to life or installing Hawaiian Punch fountains is a long way from the life of today’s real millionaires.

A couple retiring with a million dollars in their IRAs today should safely spend only about $32,000 a year. That’s assuming the couple retires at age 65, expects to live to age 90, and has $1 million in retirement accounts earning 5% annually.

Living on $32,000 per year is hardly a grandiose lifestyle. (In fact, it’s precisely two times the poverty level for a family of two living in the “mainland” United States for 2016.) You would think $1 million would at least provide enough retirement income to be in the upper middle class. After all, simple math suggests that $1 million should provide $40,000 of income for 25 years.

The Twin Termites

But two things are eating away at your retirement savings like twin termites:

  • Taxes: 401(k) plans have attractive tax benefits, allowing you to put away money before taxes during your working years. But when you retire, the federal tax collector finally gets his deferred payday. All distributions from company retirement plans are normally taxable as ordinary income in the year the money is withdrawn. So if you’ve saved $1 million in retirement accounts, the amount you will actually keep is closer to $800,000. (Most, but not all states, tax retirement plan distributions too.)
  • Inflation: Inflation also eats away at retirement assets. The cost for living for older Americans increases by about 3% per year, which may not seem like much. But an inflation rate of 3% reduces the purchasing power of a dollar to only 50 cents in just 24 years. So what can you do?

If you’re approaching retirement with most of your money in IRAs or 401(k) accounts, you can still take steps to make your nest egg last longer:

  • Create Streams of Income: A stream of income is a source of money that keeps flowing as long as you live. The most common source of steady income for Americans is Social Security. The average Social Security benefit is currently $1,341 per month. (You can get an estimate of your Social Security benefits by going to You can start to receive Social Security benefits as early as age 62 and as late as age 70. Taking them early can significantly reduce your monthly payment, while taking them after your full retirement age earns you a premium. (Of course, you have to be alive to get benefits, so deferring the start of payments requires some guesswork and careful priority setting.) 
    Earlier, we calculated that $1 million of retirement assets could safely sustain about $32,000 spending. If the average monthly Social Security benefit is added to a $1 million nest egg, the “safe” retirement spending amount for a couple increases to about $49,000. In addition to Social Security, other streams of income include annuities and income from a part-time job. Low interest rates have made annuities less attractive, but many retirees like the lifetime income that annuities provide.
  • Work Part Time during Retirement: A part-time job can also help a nest egg last. But if you start Social Security before your full retirement age – 66 or 67 for most people – and earn more than $15,720 during 2016, your benefits will be reduced.
  • Start a Roth IRA: A Roth IRA is the opposite of a traditional IRA from a tax perspective. A Roth IRA does not have any tax benefits right away, but your money comes out tax-free during retirement if certain conditions are met. With a Roth IRA, income taxes on the money to fund your account are paid up front while you’re still working. That’s different than for a regular IRA. Income taxes for a regular IRA are due in the year you take money out. Wouldn’t you rather pay taxes now while you’re employed rather than having to come up with the money during retirement?
    • Plus, if income tax rates go up in the coming years, your Roth IRA account is protected from any tax increases.
    • You may also be able to covert a traditional IRA to a Roth IRA, paying taxes as you go, but the conversion can be tricky from a tax standpoint. So you should get advice from a financial planner before contributing or converting to a Roth IRA.

(Readers are strongly encouraged to consult their tax advisors before taking any action that might affect taxation on retirement assets.)

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