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Why $1 Million May Not Be Your Magic Number for Retirement


Back when your parents or grandparents were daydreaming about retirement, $1 million seemed like a magic number. That was then. Today, $1 million won’t get you very far during retirement.

Here’s why.

One million dollars is no longer the magic number for retirees because it’s not the same value that it used to be. Since 1975, inflation as measured by the Consumer Price Index, has risen an average of more than 4 percent a year. One million today has the same buying power as $227,683.43 did 39 years ago, explains Michael Farr, president and CEO of wealth management firm Farr, Miller & Washington and author of A Million is Not Enough: How to Retire with the Money You’ll Need.

It’s more realistic to say that you should save around 10-12 times your current salary. If you make at least $100,000 that will give you between $1-$1.2 million and will allow you to have around $50,000 a year for 20-25 years when adjusted for inflation, says Farr.

If you’re still a skeptic and think $1 million is good enough, plenty of experts disagree.

The silent killer

Inflation erodes wealth. "When we need to crystallize the theory of inflation with clients, the examples of the cost of milk, postage or even a new car today versus when they started working usually results in an understanding that the value of $1 slowly erodes over time," says Bradley Bofford, managing partner, Financial Principles.

Interest rates

In the current environment, Treasuries, CDs and savings account yields are at historic lows. If a conservative retiree hoped to live off of the interest from these vehicles, their income has steadily decreased over the last five years. In many cases, the retiree taps principal, resulting in a snowball effect of depleting assets.

Over the next 10 years, a 60% equity, 40% fixed income portfolio is projected to return 3.25%, says Nick Ventura, president of Ventura Wealth Management. On a $1 million portfolio, this hardly provides enough for the average family to live comfortably during retirement. For the average family, to generate a median retirement income of approximately $85,000, the nest egg should approach $2 million, says Ventura.

Taxes

Depending on where the assets are invested, taxes can be another factor that will lower the net income from retirement assets. Additionally, says Bofford, there is a general consensus that tax rates will continue to increase, resulting in further erosion of wealth.

Forces beyond your control

Life is full of surprises. Many times, those equate to more money coming out of your pockets, points out Kevan Melchiorre, a private wealth advisor with Busey Wealth Management. Take for example a double whammy like market volatility and an illness that requires long term care. Suppose there was a bad year in the market, let’s say like 2008, when the market dropped 34%. That means if you began with $1 million and assumed you were going to take out 5% per year ($50,000), you could end up with only $693,000 to live off of, says Jonathan Gassman, of The Gassman Financial Group. Depending on the frequency of events (market returns) you could run out of money. "Compound that with a long term care event, which on Long Island can cost $150,000 a year – three years in, you are eating and living off Alpo."

One million today has the same buying power as $227,683.43 did 39 years ago

Know too that dependable income sources are a dying breed. Historically, Americans could rely on some type of pension or other defined benefit plan, along with Social Security to fund their retirement living expenses. This made it easier to maintain savings and not need those buckets for income, says Melchiorre. Consequently, you need more savings than ever to sustain your lifestyle.

Longevity

"The good news is we are living longer. For some, the bad news is, we are living longer. If there isn’t enough accumulated retirement assets available because someone lived much longer than expected, then it can force the person to depend on someone to help with their income needs, as well as health care costs," says Bofford. This scenario ends up affecting not only the person who poorly planned, but the person they now rely on. The reality is that while $1 million may be enough to retire, the question is, "how long will you be able to stay retired?" asks Andrew Carrillo, managing principal, Barnett Capital Advisors.

Realize math is fuzzy

Truth is, "There is no real number. Each person has their own NUMBER and it depends on their spending and their lifestyle," says Gassman. The question is, "Do you know yours?"

Make a plan

The most important part of retirement planning is to have a plan. This includes taking a look at your current and expected sources of income and expenses to determine what your cash flow will look like during retirement and throughout your life expectancy, says Anthony Criscuolo, a certified financial planner with Palisades Hudson Financial Group.

As part of this process, establish your financial/retirement goals to determine how big a nest egg you need. "Knowing ‘your number’ is one of the most important aspects of your retirement plan, but before you can determine what your number is, you have to make a plan and establish your goals," says Criscuolo.

Take action

If you want to get to whatever is your number, you’ll need strategy and discipline. "Don’t put your kids’ education expenses before your retirement needs. Many parents sacrifice earlier retirement or a comfortable retirement to foot the bill for their child’s college expenses or children of the ‘boomerang’ generation living at home well into their late 20s," says Ventura.

Consider using a heavier equity balance in your retirement portfolio. "Having exposure to growth vehicles during retirement may add volatility, but it may also allow for a higher rate of return. This may permit higher income off of a lower starting investment base," says Ventura.

Save more. "Trim $300-$500 a month in expenses that can be put away for later use, rather than on luxury items now," says Farr. Contribute to retirement accounts as early as possible and in a tax efficient way, says David Richmond, president of Richmond Brothers.

Purchase long term care insurance. Says Ventura, "The biggest hazard to retirement success is maintaining two households at the same time. This happens when both spouses are alive, but one must go into an assisted living facility. Having insurance to help mitigate these costs can help both spouses be more comfortable in a trying time."



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Comments
58 Comments.
Comment #1 by Anonymous posted on
Anonymous
One million dollars would have been fine it it wasn't for the Fed's intervention and Manipulation of the ecomomy to support the top 1% and other buddies.

25
Comment #3 by Anonymous posted on
Anonymous
We need a strong dollar, low taxes, high interest rates and several years of deflation to get this country back on the right track. 

13
Comment #5 by Anonymous posted on
Anonymous
That combination will NEVER happen.  And low taxes are out of the equation.  Several years from now, you will think today's taxes were low.

8
Comment #10 by Anonymous posted on
Anonymous
This equation must happen, or this country is doomed.

2
Comment #11 by Anonymous posted on
Anonymous
High interest rates nullifies the deflation, strong dollar nullifies the low taxes, it is a stalemate and you idea is idiotic.

9
Comment #35 by Anonymous posted on
Anonymous
There is no reason we cannot have all four.

1
Comment #2 by Anonymous posted on
Anonymous
When 90% of the US population does not have, nor will they probably ever have, a one million dollar portfolio I'd say the $1,000,000 dream is indeed magical. 

16
Comment #52 by Anonymous posted on
Anonymous
Went to a funeral today and ran into a friend who moved out of town 8 years ago. Her husband died 2 years later and I did not know that. She was 60 and when he died 2 years later. She retired early with a early retirement buyout. She has been living on SS only and banks her pension and her husband's pension and life insurance. She has not touched their IRA's or 401K's. Living on SS only is not that hard. But it is good to have something to fall back on when you need it. 

2
Comment #4 by genievive s (anonymous) posted on
genievive s
Everyone has their own "personal rate of inflation".    The impact of inflation to me is very minimal due to my spending habits.  Sure, I must purchase groceries but even a 100% increase in food prices won't kill me.  People need to take this into consideration as the inflation numbers that are published are sometimes overstated for an individual or family.

10
Comment #6 by Anonymous posted on
Anonymous
I believe the inflation numbers are understated, unless you are on some sort of government assistance program.  Sure a person could alter their spending habits to do some adjustment to their budgets.  However, it is the necessities that hurt......utilities, insurances, medical, higher education, taxes, etc.  None of which are taken into consideration in the governments phony inflation figures.

17
Comment #7 by Anonymous posted on
Anonymous
There are so many situations that can't be anticipated years down the road. You try your best to sock away enough for a quality retirement and accept what comes down the pike. That's life.

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Comment #8 by Anonymous posted on
Anonymous
Everyone has or should have a budget to guide them. When you retire you should be debt free or work until you are. As to the size of the retirement savings I think it is like a budget one size does not fit all. My husband was put on 100% disability in 1995. I was able to continue to work until 2008 and then I retired to care for him 24 hours a day. From 1995 until the day he passed we lived on his disability check. I saved my earnings for our future and also funded our IRA's and my 401K. He passed almost 2 years ago.  During the last 12 months I lived on $22,028.21. This includes property taxes, heat, electric, phone, cell phone, internet, TV, gasoline, car, house, jewelry and liability insurance, food, entertainment, medicare, the supplements, I mow, trim, and put lime on the lawn but pay someone to fertilize, put crabgrass and weed killer on and if I have quack grass to take care of that and to blow out the sprinklers. I shovel the 80 foot driveway  every day when needed unless the snow is over 12 inches and heavy in a 24 hour period. Some 12 inch snowfalls are not heavy snow. This amount also includes a solid cherry dining room table with a 22 inch insert and 6 unholstered chairs. This does not include federal and state income taxes because my income was higher. I think you make retirement what you want. During these 19 years we have not had to get into our savings, IRA's etc. In 2010 we bought a new energy efficient home from the sale of our old one and bought a new car with the left over money from the sale of our old home  to replace our 14 year old car. We bought a new 3 bedroom 2 1/2 bath home with a 980 square foot garage, a finished walkout basement, with another kitchen, a 4th bedroom, a den and another full bath, a patio and large screened in porch. If I need it for income later, or for someone to live in to care for me it is there. We also have our large family dinners there. We can have up to 52 people down there.  The 1 million may be enough for some but no where near enough for others. I think the trick is to live below your means but still do everything you can within that amount. I also take at least one vacation a year. Because we have lived on SS  since 1995, I cannot even imagine going through 1 million dollars in the years I have left. 
I believe that those of us who are able  to save, budget and plan will be OK no matter how little or how much we have. We will adapt. 

6
Comment #9 by Anonymous posted on
Anonymous
you sound like a "Wonder Woman"!

13
Comment #12 by Anonymous posted on
Anonymous
You must be an EBT card guy or gal.

5
Comment #15 by Anonymous posted on
Anonymous
Not at all. We have been savers since we were first married, actually since my first job at 8 years old. When I married at 18 I had already saved 30% downpayment for our first house. We also had our first child 9 months to the day (married Dec 2, child born Sept 2) after we were married and he is now a doctor. 

6
Comment #17 by Anonymous posted on
Anonymous
Since you are posting as an "Anonymous" post,  just what is your approximate net worth?

5
Comment #18 by Anonymous posted on
Anonymous
I'm not #15 as you all can tell by the use of the icons by Ken's system. 

The test should be coupled with the amount of debt...income is needed to feed debt.  We live on our Soc Sec income and everything else is pin money with no debt and extensively use credit cards which are paid off each month...never a fee/interest paid on same.  Also, start taking from IRAs before 701/2 and sock that after tax money away.  Tax rates will never be lower for those making less than $100K!

2
Comment #23 by Anonymous posted on
Anonymous
I would rather not post my net worth. But because I can live so cheaply I will not have to worry. I gift to the children every Jan 1 and I also disclaimed my husband's traditional IRA's when he passed and put a couple of large CD's  that I had been saving for his care if I died first in a savings account when they matured with his name and the children as beneficiaries so the children would inherit it when he passed. I believe that with my SS and IRA and with the sale of the house I can be kept in a nursing home if necessary for a long period of time or the money can be  used it to pay for someone  move in to care for me. But this is not in my plans. Every year I continue to convert a portion of my traditional IRA to a Roth using money for the conversion instead of paying federal tax on the interest earned. When taxes are so low and interest so low I believe this is the best choice for me.  I most likely will not use the Roth's and the kids will inherit them tax free. I certainly do maintain that in the near future those of us retirees with a MAGI of $45,000  for all singles and couples instead of $85,000 for singles and $170,000 for couples will be paying a lot high Medicare premium. I am preparing by converting to a Roth as much as I can each year. So far this drawing down from a Roth would not be included in MAGI. The higher Medicare premium is stated in Paul Ryan's budget and Dave Camp's tax reform that he proposed. 

2
Comment #38 by Anonymous posted on
Anonymous
Have you considered Medicaid?  See most recent posts to this thread

1
Comment #40 by Anonymous posted on
Anonymous
I don't think #23 needs or can even qualify for Medicaid.  Read his/her posts.  Lives very cheaply by choice, not by lack of resources or income.

4
Comment #13 by decades posted on
decades
Social security benefits will have to be reduced or taxes have to rise probably both will happen. . The country is broke, as is its infrastructure

4
Comment #24 by Anonymous posted on
Anonymous
SS is in trouble because interest rates are low. As more people go back to work and the economy recovers and interest rates go up SS will look a lot better. The infrastructure needs a big boost. Congress has invested 28% less now in infrastructure than in the 1980 recession. 

1
Comment #14 by decades posted on
decades
we just had a retirement planning meeting at work last week . First thing they told us was we would need 1 to 2 million to retire now . Everyones jaws dropped as most of us won't even make 2 million over our working lives. It was a sad sight . One employee lamented how his previous employer had eliminated his defined benefit pension plan. The guy next to me said his girlfriend wanted to have kids but he didn't want to bring them into a world like this . I lamented the private sector declining real wages over the last few decades. Another guy summed up the situation with ...We're all ****ed , but our kids are really ****ed !

5
Comment #16 by Anonymous posted on
Anonymous
Since your retirement planning meeting was at work, everyone should have asked for a immediate raise to meet the experts forecast!

6
Comment #19 by QED posted on
QED
Next spring, the spring of 2015, late in April or very early in May (cannot recall), and assuming I'm still alive, I will celebrate 30 years of retirement.  Mine has not been one of those "working" retirements.  I've been 100% retired;  no work at all.

The planning was tough.  I did computer projections back in '85.  I had to write the programs myself and I ran them on an (what is today) old Commodore 64!!  But those projections were quite helpful and predictive.  And they were modestly accurate.

Only in these most recent years has my planning been placed in any serious jeopardy.  I never planned, back in 1985, for "income redistribution", AKA "legalization of theft".  I did not foresee Obamacare, but I am fortunate enough to be too old for it to have hit me directly.  I also never foresaw an incoming windfall, later in life, quite recently.  I won't be specific, but it was akin to a lottery win (not that, though, and not an inheritance either).

Anyway, this advice comes from somebody who has "been there, done that":  Plan carefully my friends.  And look beyond mere money.  My biggest concern now is not money at all.  I remain in good health and try to take proper care.  But I know some day I will need competent medical care and I realize, thanks to Obamacare, the best and smartest doctors are fleeing the profession or soon will be.  Doctoring is not now the lucrative profession it once was.  So my planning today concerns how I will obtain medical care abroad if need be.  How will I be able to travel if ill;  stuff like that.  You see, it's all in the planning.      

10
Comment #20 by Anonymous posted on
Anonymous
Likewise, when I was modeling my retirement, I never planned for "income redistribution", AKA "legalization of theft".  Agree with you 100%.

10
Comment #21 by Anonymous posted on
Anonymous
Income redistribution is what got me to retire 5 years ago, can't take it if I don't make it. Now it's fun being on the receiving end, like the 100% free healthcare I'm getting because the Healthcare exchange is completely broken here in MA. Glad I was at my magic number when this country voted in change,  not sure how the change has been for them but I'm having the time of my life

3
Comment #22 by Anonymous posted on
Anonymous
Isn't MA on Rommeycare?  I heard the clock is ticking for the 100% free heathcare for MA.

2
Comment #27 by Anonymous posted on
Anonymous
Our Healthcare exchange worked great before Oct 1 when they had to add Obamacare part into it. From what I read is they are scrapping it now and will be using the Federal Healthcare site, so I figure should be good for a a month or 2 of more free insurance then move onto to subsidized 

1
Comment #30 by Anonymous posted on
Anonymous
If what you say is true, imo, It sounds like MA had contracted with an incompetent IT firm.

3
Comment #31 by scottj posted on
scottj
MA contracted the change to Obamacare to some company in Montreal, pretty surprising when you think about all the companies we have here. They are saying it will be too expensive and time consuming too fix so just scrapping it 

2
Comment #32 by Anonymous posted on
Anonymous
More cost to taxpayers and couldn't use a US company.  What is happening to our good old USA?

4
Comment #25 by Anonymous posted on
Anonymous
My son is a doctor and his wife an ER nurse. Neither are fleeing their profession. They did not become doctor and a specialty nurse for the money. 

8
Comment #26 by QED posted on
QED
I am respectful of what you reported.  Just wanted you to be aware of that.  Many doctors and nurses will not flee.  Problem is, our population is aging.  There is already today a large shortage of doctors.  The last thing we need as a country is for any doctors and nurses to be leaving the profession.  Large numbers already are.  Many more will follow through early retirement, cutting hours, etc..  And this is to say nothing of smart young people who will opt out, who today will not go into medicine because there are other more attractive options.  Becoming a nurse is difficult.  Becoming a doctor is even more difficult.  Such people deserve our respect and encouragement.  Our very lives could depend on them being available in our hour of need.  

I want doctors and nurses to have the financial incentives they traditionally have enjoyed.  Instead they are being squeezed because they earn more money than Obamacare-loving socialists believe is appropriate.  For me personally this is not good.  It is a problem needing solution.  It is a problem which easily could, at some point in future not too distant, threaten my life.  Obamacare is an asinine, un-American, catastrophe.

5
Comment #29 by Anonymous posted on
Anonymous
Doctors are constantly complaining their reinbursements from Insurance Companies & Medicare are being reduced.  This may be true.  But they have found a way to create more patient traffic (ie: income) by making patients come back for other tests that should have been done in ONE visit.
They make up some stupid excuse like the tech isn't in the office today.  Don't the Doc know how to do the test?  He certainly knows how to review the results and charge.

Please don't anyone contradict me on this one.  It recently happened to me!  And I'm not very happy about it.

Docs today do less per visit and want to see you more often.

8
Comment #33 by Anonymous posted on
Anonymous
Ahh, for the "good old days" when there was no Medicare and doctors had cashflow problems (big time) but now there is medical coverage that includes those that were excluded through (of all places) private insurance companies...luv the free enterprise system!

6
Comment #53 by Anonymous posted on
Anonymous
I get a complete physical every year. Took 90 minutes in the 80's when it started to be covered by our insurance and it still took 90 minutes this Jan. I don't go back unless I have an issue. 

1
Comment #54 by Anonymous posted on
Anonymous
And, if I "really" have an issue I pay a doctor outside of my coverage and take the results to my insurance carrier doctor, i.e. "they" cannot ignore a "problem."

1
Comment #56 by Anonymous posted on
Anonymous
I have Medicare and a supplement. I know how much the doctor charges and how much Medicare and my supplement pays him and what if any I may or may not be charged. This has been this way for all the years I have had Medicare and my regular insurance before I was 65. Doctors now get their money from Medicare with-in 15 days not like days past. 

Not making excuses for tests but having worked in a medical office in the past, medical professionals after reviewing the results of the exam with past exams something may pop up and need further evaluation. I for one want those additional tests when warranted. My sister was diagnosed with a severe ailment that was caught in time as was my mother. 

1
Comment #60 by Anonymous posted on
Anonymous
You would rather pay 50% in federal income tax that many paid in 1985? HMMMMM How soon we forget. 

1
Comment #61 by Anonymous posted on
Anonymous
and who paid 50% in federal income tax?

1
Comment #34 by Anonymous posted on
Anonymous
The last paragraph of the article is interesting...anyone have experience/knowledge on purchasing a life/income annuity for immediate income to/for the spouse (that does not need "long term care") and continues to live in the family house so that the other spouse can qualify for Medicaid?

2
Comment #36 by Anonymous posted on
Anonymous
#34 Would you elaborate on the type of SPIA your referring to?

1
Comment #37 by Anonymous posted on
Anonymous
What is SPIA?  Certain assets must be used before one qualifies for Medicaid to cover assisted living, e.g. dementia.  Anyone "used" some of the (otherwise available) assets to buy a life current payment annuity for the stay at home spouse and thus, no "need" to pay for a second home for the "dementia" spouse.  What insurance companies are participating in that?  Any history anyone wants to share, etc.?

1
Comment #39 by Anonymous posted on
Anonymous
"SPIA" is another name for immediate annuity.

From what I read, only certain types of "annuities" qualify for what your talking about.  I believe they must be "medicare friendly".  I don't know any more than that.  Seems one needs a lawyer (which I am not) to make sure it's done/purchased correctly.

1
Comment #41 by Anonymous posted on
Anonymous
Rest assured that Medicaid requirements will continue to become more stringent as the funds are rapidly depleted. There is a vibrant industry (lawyers and insurers) dedicated to helping people transfer the burden of long-term care from the individual to the state. Check your individual state requirements...they can be tricky and costly to negotiate.  

2
Comment #42 by Anonymous posted on
Anonymous
Appreciate the "caution"...still looking for any specific feedback for those that ventured in this direction...it clearly impacts the "1 Million" question of this thread.  And, it is a state unique issue.  Any evident marketing by ....on the annuities, etc.?

1
Comment #50 by Anonymous posted on
Anonymous
I have experience in several cases. Poor people have little problem with qualifications. Those with substantial assets will have to spend down, transfer, purchase annuities etc. in conformance with federal and state regulations before qualifying. . If personal assets are not allocated according to the law a clawback or denial of benefits (for a period of time) can and will occur. Google SPIA's and Medicaid and you'll get useful advice. The ACA has made Medicaid the focus of much debate...expect ongoing changes.   

1
Comment #55 by Anonymous posted on
Anonymous
Thanks...very helpful info

1
Comment #46 by Anonymous posted on
Anonymous
As it should be.  I hear and see too many well off elderly people giving away their assets which would have taken care of their long term health care should the need arise.  Then they expect you and me and all the other tax payers to shoulder the cost of their long term care through government assistance.

11
Comment #48 by Anonymous posted on
Anonymous
#46, I agree with you.  I have purchased Long Term Care insurance to cover both my spouse and myself.

10
Comment #51 by QED posted on
QED
You are spot on!!  These people are simply thieves.

12
Comment #57 by paoli2 posted on
paoli2
Why is it ok for many to open and close accounts with banks just to get a few hundred dollars knowing they don't intend on becoming customers because as they excuse it "it is allowed by the bank" yet people taking advantage of giving away assets before long term care are considered "thieves".  The second group are only doing what our government allows them to do.  Are people who take advantage of tax "loopholes" and get big refunds back considered "thieves" also?  I could go on and on but since I have not done any of these acts I guess I am not a thief "yet".

1
Comment #58 by Anonymous posted on
Anonymous
Right on!

All, be careful as to what is legal, ethical, etc.  I recall a homeowner with a "purchase money" deed of trust, i.e. a mortgage taken out to buy a home.  Since the Depression there has been legislation in some states that precluded deficiency judgments, i.e. going after the deficiency if the property "returned" to the first lender and is sold for less than the current first.  The lender looks to the property NOT the creditworthiness of the homeowner!  Several states adopted it then and the feds recently had a program on same.  Obviously there is no tax liability if one did not have a personal liability in the first place!  Is it wrong to avail oneself of same and, in effect, opt out? Most think not!  When/if that loan was refinanced, do you think that the homeowner was told the old "non-recourse" loan was going "recourse?"  Probably not! 

And, the "thief" is...?

All, have a great week!

1
Comment #49 by Anonymous posted on
Anonymous
To the moderator who keeps deleting my posts.  Why are you doing this?  I am stating facts that are replying to a poster that is trying to milk the taxpayers!

5
Comment #59 by paoli2 posted on
paoli2
#49  I have no idea what posts they are deleting but I know it doesn't always have to be about the facts but how we present the facts.  Maybe they didn't find certain words acceptable or politically correct.  I do think they should at least have to show us what posts they delete so we can learn from our "mistakes".

1