Why $US1 Million Won’t Cut It In Retirement

Oppenheimer Funds

This is the fourth post in the 8-part “Taking Stock Of Your Financial Advisor” series, focused on the dynamic relationship between high-net-worth investors and their advisors. “Taking Stock Of Your Financial Advisor” is sponsored by OppenheimerFunds. See more posts in the series ».

Who wants to be a millionaire

Let’s face it — a million bucks isn’t what it used to be. You know it. We know it. Even millionaires themselves know it.

In a recent UBS survey, well-heeled investors said they won’t actually relax about retirement savings until they hit the $US5 million mark.

We’re not opposed the idea of miracles happening, but the reality is that most Americans are far (far, far) away from that kind of milestone.

The average 401(k) balance for pre-retirees (55 years and up) has nearly doubled since the depths of the downturn, but still sits at just$255,000.

In what might be one of the most sobering assessments of America’s retirement crisis this year, The New York Times’ Jeff Summer threw a proverbial cold bucket of water on anyone who still thinks $US1 million is all it takes to retire well.

“Inflation isn’t the only thing that’s whittled down the $US1 million. The topsy-turvy world of today’s financial markets — particularly, the still-ultralow interest rates in the bond market — is upending what many people thought they understood about how to pay for life after work …

For people close to retirement, the problem is acute. The conventional financial advice is that the older you get, the more you should put into bonds, which are widely considered safer than stocks. But consider this bleak picture: A typical 65-year-old couple with $US1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 per cent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $US40,000 a year, adjusted for inflation, there is a 72 per cent probability that they will run through their bond portfolio before they die.”

But let’s step back for a minute. Who decided $US1 million was the benchmark every worker should strive to achieve anyway? Retirement savings are completely unique to each person depending on their income and lifestyle. “Knowing your retirement number” is one of the most oft-repeated pieces of financial advice out there and yet it is decidedly difficult to calculate.

Not only do you have to take into consideration your age, risk tolerance, health care, tax bracket, and rate of expected investment growth, but you have to constantly adjust your goals as these variables undoubtedly change over time. Fixed costs like health care, education and housing are constantly rising and can seriously throw a wrench in retirement savings.

“Younger generations, especially, need to set their retirement goals higher than other generations and start saving as early as possible,” Craig Hogan, Scottrade’s director of customer-relationship management and reporting, told TheStreet.

One of the first topics your financial planner will address will be your retirement goal. If he or she doesn’t, then maybe it’s time to spend your money elsewhere. Knowing your number is a crucial step toward achieving your goal. You probably won’t have to hit that number down to the penny, but having a concrete dollar figure — rather than a random sum — will give you the kind of motivation you need to get there.

Want to get a head start? Here are a couple of free retirement number calculators available online:


The Journal of Financial Planning