I recently read an article on Daily Finance that posed the question of whether having one-million dollars was enough to retire.
For many, one-million dollars is perceived as being the classic bench-mark of finally having enough money to retire as well as a symbolic goal for finally “being rich”. But as you can expect, the article posed several questions about whether retiring on one-million dollars had become a myth. Would it be enough to retire or stop working altogether?
Where Does One-Million Dollars Get You?
Perhaps it’s a sign of the times that our expenses have gotten out of control. Or maybe our society just simply “thinks” they need too much to live comfortably. Either way, we can explore this situation a little further.
Let’s pretend you managed to save one-million dollars. For simplicity, we’ll ignore the whole “waiting until age 59 ½ requirement”. Also, we’ll assume a worst-case scenario and say you’re going to pay taxes on the money you withdrawal from it.
The classic system for living off your money is to keep it in the investment account and withdrawal some small amount each year; usually around 4%. If your account makes more than that, then great – it just goes back into the account and acts as a buffer against inflation.
Assuming we withdraw 4% from this account every year for living expenses, you’d have:
• $1,000,000 x 0.04 = $40,000 per year (or $3,333 per month)
Since we’re assuming a worst-case scenario and that this money is NOT tax free, let’s apply a standard 25% tax rate:
• $40,000 x 0.25 = $30,000 per year (or $2,500 per month)
What Do You Really Live On?
Some of you may look at $30K and say that’s plenty. But I’m also willing to bet that many of you may be thinking how you could ever possibly retire on that much money.
Maybe $30K doesn’t sound like a lot of money. But is it possible that it’s what you’re already living on?
I recently wrote a post on how your expenses during retirement may be different from what they are today. Consider that if you stop working, you may no longer have to pay such expenses as FICA (Social Security and Medicare) deductions, 401k contributions, IRA contributions, and other work expenses (gas, lunch, etc.). In addition, if you play your cards right, you’d hopefully also be at a point where you no longer have mortgage payments, car payments, and daycare expenses. Basically you may actually only need 50 to 75% of your current income. See my list and try it for yourself.
Your Individual Needs
So how much money do you REALLY live on? Is it closer to $30K per year? If you really wanted, could it be?
I am certainly not implying that we should all retire when we reach $1M and live off $30K a year. This exercise is intended to demonstrate that $1M may not be a myth for some people and that you may actually need less money than you think you do.
Consequently, if you save large proportions of your income, you’ll learn to live off of less money. When calculating how much you’ll actually need for retirement, you’ll find you don’t need as much as you’re making now because you can finally cease all this saving.
Just as the Daily Finance article concludes, each person’s situation is unique. I couldn’t agree with this more. Your ultimate decision to stop working all depends on how badly you want to, what sacrifices you’re willing to make to get there, and your plan to make your money last as long as possible.
Have you given any thought to how much you’d need to retire? What is the minimum amount you think you would need? Do you think one-million a myth for you?
1) When Is the Best Time to Start Saving for Retirement?
Photo credit: One Million Ones by rasputin243 on Flickr
Invest It Wisely says
By the time a person in their 30s gets to that age, retirement will be obsolete anyways. Physical and mental disabilities will be cured and aging won’t be the problem it is today. That said, still save capital because you will have that much higher of a quality of life down the road.
That sounds very optimistic, and I hope you are right about that! But perhaps I’m using the word “retirement” too loosely. I often use the word retirement to mean “being able to stop working if I wanted to” rather than reaching old age. What if a person in their 30’s decides they want to simply stop working by their 50’s or even 40’s? We know this to be true of many of our other fellow financial bloggers. In that case, retirement would be much sooner than later. I have always thought of a million dollars as being pretty significant. After running the numbers, $30K per year is a lot of “passive income” to be made on that $1M. Is that the breaking point where a person could walk away from their job if they really wanted to?
Aloysa @ My Broken Coin says
I think with age our cost of living might go down because we will be consuming less and saving more. Of course medical expenses might quite high on the list. I think if we lower our expectations, we might be able to retire with one million. I have a friend who expects to retire at 500K. She is convinced she doesn’t need more than that.
I completely agree! This was just one out of many articles that tried to point out that $1M is no longer enough to retire. But why does that have to be? Do we really have that many expenses later in life? If we learn to live on less, put more away for savings, and pay off our debts sooner than later, maybe we’ll actually need a lot less than we think.
Your friend’s goal of $500K sounds pretty bold. But if she’s considered her expenses and done her math, then I’d say no one knows her situation better than she does. And good for her – she’ll probably get there much sooner than the rest of us!
Kris @ simple island living says
I think that everything we save from mortgage payments/car payments/childcare, etc, might be eaten up by what we really want to do in our retirement…travel! We’re aiming for $1.5mil. Travel buffer.
Nice job having a goal to reach! I’m in agreement with you. We’ll probably strive for 80 to 100% of our current income, not because of our debt, but because of traveling and other passions we’ll want to pursue. Having low debt will just be a security blanket.
You are way, way, way overstating taxes.
Standard deduction ensures no takes on about 13k for married couples. Then they pay into the 10 and 15% brackets. Rough calculation shows final tax bill is about 8% of the 40k draw. 66% less than your estimates!!!
Once you turn 62 you are elgible for social security. That is probably a significant income steam, say 20k/year before taxes. Hardest part is bridging the gap between retirement and Medicare years.