One million dollars has been the benchmark for individuals saving for retirement. But is one million dollars enough to live comfortably on? You might be surprised by the answer.
If you enjoy watching old spy movies, you might feel that one million dollars is a lot of money. If it was enough for an evil tyrant to hold the world hostage for the tidy sum of one million dollars, surely it is enough for the average person to retire on. But is this still enough to currently live off?
How Far Will 1 Million Dollars Stretch?
At some point, savings will need to be drawn upon. At what age do you intend to retire at? 35? 55? 65? How long do you anticipate drawing on your capital? Life expectancy tables can be consulted as a general guide. Australia has a very high life expectancy rate of roughly 82 years average for both sexes.
If one were to retire at 55, you would need to forecast 27 years of drawing on the funds of one million dollars. This translates into 3 thousand dollars per month – perhaps not quite the lucrative lifestyle first imagined for early retirement. Of course this makes some assumptions which we will deal with in a minute.
But we also need to consider the expenses of retirement. Here are some expense items to consider:
- Other Pensions and Monies
Is the one million dollars the only source of income or is there other funding such as government or company pension? If so, the one million dollar savings will stretch further.
- Retirement Lifestyle
What do we plan to do once retired? Do we want a lavish lifestyle on our own personal yacht or are we content with a modest living? Will we be travelling the world or just spending time with our grandkids?
- Taxes
Some people make a modest living their whole life saving money in tax shelters. But once a certain age is reached, the government may require drawing on the funds and paying taxes on the capital. Some have found their sizeable retirement drawings have pushed them into a very high tax bracket. Calculating how much tax will need to be paid is a very important factor to consider.
- Health and Other Expenses
That fantastic company benefit plan may not fully cover you once retired. As we age we generally need an increasing amount of health services. Insurance plans may be less inclined to cover us, and if they do the premiums are undoubtedly higher. As well, other unexpected costs might arise. Have we factored this into our monthly or annual drawings?
There is one other major factor to consider when analyzing whether one million dollars will be enough for retirement: investment versus inflation.
Inflation and Retirement Investments
Most retirees will want a lower risk investment than when they were just starting in the working world. Retirement is a time where most want to feel financially secure and well looked after. Because of this, the savings will usually be in a potentially lower yielding investment than previous. And the rate of interest you receive will need to be weighed against the rate of inflation. It could be that the one million dollars might be worth a lot less in time that you once hoped.
The Consumer Price Index is a commonly used barometer for inflation. The CPI tracks the changing value of certain staple items that we as the consumer would purchase such as food and clothing. In 1972, what you could buy for 20 dollars in Australia would cost over 166 dollars in 2009. In just 37 years the value of one million dollars would only have the purchasing power of about 120 thousand dollars in 1972.
You can check the values of the changing Australian Consumer Price Index yourself with this link. You will need to have compatible spreadsheet software to view it.
What does this mean? At a minimum you should have a low risk yield on your one million dollars that is equivalent to the inflationary rate. Anything less will quickly erode your savings.
The One Million Dollar Case Study
Let’s walk through one person’s example to see how much he will need in retirement. Bob wants to retire at 60. He hates talking about mortality so he calculates on living past 90 years of age. Bob first works out how much his monthly expense will be when retired.
Bob leads a relaxing life and likes to travel to see his children often. Bob also eats frequently in restaurants and enjoys going to live theatre and music. His health is average. After working out the math, Bob will need a net of four thousand per month to cover all anticipated expenses.
At four thousand dollars per month Bob will need to have an investment that will provide interest rates equal to inflationary levels. With these numbers, Bob will need to have 1.44 million dollars at retirement of 60 will be out of money by 90 years of age. Or if he does spend four thousand per month with only 1 million in savings, he will be broke by 81.
With these numbers Bob will either have to live on less than 2,800 dollars per month or have a higher interest rate on his one million dollars to sustain his lifestyle. Or Bob simply needs more money.
Conclusion on the One Million Dollar Retirement
For those that already have one million dollars in savings and are drawing upon the interest and capital, it may be enough for a decent lifestyle. However, should one million be our target for 20 or 30 years down the road? Likely for those just starting to plan for retirement, a much larger figure would be in order to fight inflation. As 100 dollars turned into 12 dollars of worth in 37 years, one million could be the new 100 thousand in the next 30 years or so.