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[Video] Is $1 Million Enough to Retire at 65?
In this video, Tim breaks down whether a $1 million nest egg is enough to retire on at age 65 in 2024. He discusses Social Security, Medicare, and strategies for withdrawing retirement income. Tim analyzes a client's specific situation, including her $100k income and expected $80k annual expenses in retirement.
Is a $1 Million nest egg enough to retire at age 65 in 2024?
This past week, I had a client I’ll call Jane Smith with about a million-dollar nest egg, and she lamented that it wasn’t enough for her to retire. But then, we broke it all down and her perspective changed by the end of our discussion, and she felt much better.
It started like this: “Tim, $1 million dollars isn’t what it used to be, I don’t think it’s enough.” While $1 million doesn’t have the purchasing power it used to, due to inflation, answering the question “Is it enough?” is going to vary depending on many variables unique to each household.
Obviously, expenditures and the number of income streams available are going to play a key role in determining how far $1 million can sustain one's finances throughout retirement over a span of a 20-, 30-, or 40-year retirement period.
Now, let’s take a look at a standard or common situation with most retirees.
Social Security and Medicare
Social Security and Medicare are important changes for retirees. A retiree at 65 is typically eligible or nearing eligibility for both programs, which offers significant advantages.
First, at 65, we can receive Medicare, and this should help reduce medical costs significantly. While Medicare does not cover all healthcare expenses and is not entirely free, because you still pay for parts B and D, basic health insurance costs are alleviated.
Second, most of us are going to receive Social Security in one form or another, and this is an important input for retirees. Even if it isn’t going to pay us all we need, it can do a good deal of heavy lifting for us.
How much and at what age to claim your Social Security benefit can make a large difference for retirees. And if you want more info on when to claim your Social Security benefits, check out my article titled: “When should I take Social Security?” But for the sake of this video, we’re going to assume Social Security will kick on at 65 and will be $3,400 per month or $40,800 per year.
Retirement Accounts
While retirement involves many variables, in general, the main question revolves around whether the combined income from retirement accounts and Social Security can meet one's expenses.
A common rule of thumb suggests withdrawing approximately 4% from a retirement account annually, factoring in returns and principal drawdown, is a safe withdrawal amount and will provide several decades of steady income. So, a $1 million retirement account translates to an initial annual withdrawal of around $40,000 a year or $3,333 per month.
However, at my firm, we use a dynamic guardrail withdrawal approach, and this process allows us to send a higher amount to our clients, typically between 5-6% as determined by risk tolerance and some other expectations of the clients. And we can send this higher amount because our approach adapts to the market returns.
Our clients really enjoy this approach and they like knowing what amount we can safely send them in dollars and cents as opposed to some Monte Carlo percentage that many don’t find very useful.
Retirement Expenses
Next, we determine spending and needs, so we can know what we will need for income in retirement.
A commonly applied rule suggests that in retirement, individuals typically require around 80% of their current income to maintain their existing standard of living. This shift is attributed to changes in financial dynamics during retirement, mainly, we’re no longer contributing to retirement accounts and we’ll have reduced tax obligations like FICA, which was what used to come out of our paycheck as contributions to Social Security and Medicare.
We will also need to consider expenses specific to our lives, including housing: obviously for those residing in major cities, rental or ownership costs are going to be higher than in rural areas.
We’ll also need to plan for medical needs. We’ll need an emergency fund to cover unforeseen expenses, like home repairs or unexpected vehicle issues. Typically, 3-6 months of expenses is a good amount for an emergency fund.
Then there is sequence-of-return risk. This is the likelihood of selling assets during a market downturn. This can be detrimental to retirement, and can be mitigated by setting aside cash and fixed income or more steady, conservative investments. We call this the “war chest” at my firm. This allows retirees to tap into savings when investments go down, to give them time to bounce around and go back up.
An Example Case Study
Now, as of 2022, the median household income was around $75,000 per year. And Jane is actually doing a bit better than that, and she’s earning over $100,000 per year. So, when she retires, we’re going to assume she will need 80% of that or $80,000 per year in retirement.
Now, we can get very detailed with planning assumptions and expenses, but for the sake of this video, I’m going to keep it to generalities because I want to give you a basic framework of how to think about a million-dollar nest egg and how it could work for you.
So, Let's say she has $3,400 per month or $40,800 per year coming from Social Security, and we determine we can send her 5.4% from her $1 million nest egg, which would be $4,500 per month or $54,000 per year. Her Social Security benefit, combined with what we can send her from her nest egg is going to add up to $94,800 per year. So, if she needs $80,000 per year and she can safely receive $94,800 per year, she’s in good shape.
For the actual conversation I had this past week, Jane has a partner, and they keep financials separate. But she mentioned he was going to pay some of the monthly and annual bills, so she would only need $4,000 per month or $48,000 per year, which would be easily surmountable.
In actuality, Jane is still working and plans to for a few more years, and is a few years younger than 65. So, considering plans are always changing and adapting, generalities for her in this situation were perfect and helped put her mind at ease, which is, of course, always the goal.
Bottom Line
Having “enough” in retirement is always a function of cash flows. Depending on your expectations, a $1 million nest egg can, indeed, provide a comfortable retirement income. Even with conservative estimates, Jane should be in a good spot in a few years assuming she has no major changes.
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