One million dollars. $1,000,000.000. It’s a lot of zeros, and it seems like a lot of money. Enough to last forever, right? Wrong. A million dollars isn’t what it used to be. Most especially when you are considering retirement.
Let’s assume you currently make $65,000 a year. You have a million dollars saved for retirement and are turning 65 next year, your chosen retirement age. Your parents are still alive, you grandparents lived well into their eighties, and you have generally good health. You imagine you’ll live into your eighties as well, maybe even make it to ninety. It’s an educated guess. Assuming you will live to be ninety even, that means your million dollar nest egg must last 25 years.
Removing all other factors (which is not realistic but serves our purposes for this exercise,) let’s assume you can only take $40,000 a year if you want your money to last the rest of your lifetime. That’s $25,000 less than what you currently bring in a year.
Are you shocked? Your million dollars doesn’t stretch as far as you probably thought.
Ignoring, for now, two significant issues that dip into your nest-egg—taxes and inflation--there are other factors to consider. Your spending is likely to change in retirement. The chances are good that you’ll want to travel a little. You spent your life working, once you’re retired it makes sense to enjoy yourself. Maybe you’ve always wanted to take a Mediterranean cruise or an Alaskan cruise, tour Europe, or visit Japan. A lot of people put off the dream vacations for retirement. It’s understandable. However, vacations are expensive. On average, the top ten most popular dream trips run about $5,000 for two. (Source: Business Insider)
Beyond your leisure life, you can probably count on health-care spending to increase as you age. As you age, not only will your insurance cost more, you will likely take more medications and require more care. Long-term care is another expense you might need to consider. The average annual cost of an assisted-living facility last year was just under $50,000, depending on the state. For one year. That’s more than we assumed, in this example, that you’ll be able to withdraw a year.
Long-term care costs are expected to rise, year after year. In twenty years, the same care is projected to be closer to $78,000 a year. (Source: Genworth)
If you live longer than expected, and your care costs rise that much, then what? And we can’t forget the surprising need for a new roof, furnace, vehicle, etc. Unexpected expenses could feel very different when you’re looking at a set income.
Then, you have the fact that the dollar’s value changes. Inflation means that what you can buy for the same amount of money changes. Just like the postage stamp, the price of goods and services just keeps going up. The same sum of money doesn’t stretch as far. Your money won’t grow on its own, so while the price of things you buy rises, your million dollars gets you less.
And of course, we have the tax man. You’ll have to pay taxes every year, and likely any time you make a withdrawal.
So your challenge, after amassing what seems like a significant amount of money, is to make it last. It is the ultimate budgeting task, and many aren’t prepared. Retiring, and seeing all those zero’s in your bank balance, might feel like getting the largest Christmas bonus of your life, and the urge to spend follows.
You got to where you are now with discipline. The disciplined saver must learn how to be a disciplined spender.
Just as you might have tried to teach your children the value of a dollar, you must relearn that same lesson with a different focus. How many years of your life did you save, just to support one year of your retirement? Five, six?
The picture that you’ve just glimpsed may seem bleak, but it doesn’t have to be. A financial plan can help you save to retire with the lifestyle you want to have. An investment advisor can help you invest your money to keep up with inflation, and weather the volatility—the ups and downs—of the market. Growth is necessary, but the variations that come with it can be terrifying to see. Your account balance will fluctuate. With a million dollar balance, your account could change by $120,000. That’s nearly twice as much as you made in a year. Can you say intimidating?
A financial advisor can help you weather the emotions while building a plan that will get you to the end of your journey. A plan that will help instill confidence. Instead of worrying, going without, or overspending.