A recent CNBC article indicated that 58% of those who responded to a 2019 TD Ameritrade survey felt that a $1 million retirement nest egg would be sufficient to fund a comfortable retirement. This may or may not be the case depending upon your individual situation. To me it seems more meaningful to look at the level of income you’d like to generate in retirement and then determine if a given lump-sum, combined with other sources of retirement income, will support that income stream. Let’s take a look at what it takes to provide $100,000 income annually during retirement.
The 4% rule
The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years. This very useful rule of thumb was developed by fee-only financial planning superstar Bill Bengen.
Like any rule of thumb it is just that, an estimating tool. At your own peril do not depend on this rule, do a real financial plan for your retirement.
Using the 4% rule as a quick “back of the napkin” estimating tool let’s see how someone with a $1 million combined in their 401(k)s and some IRAs can hit $100,000 (gross before any taxes are paid). Note this is not to say that everyone needs to spend $100,000 or any particular amount during their retirement, but rather this example is simply meant to illustrate the math involved.
Doing the math
The $1 million in the 401(k)s and IRAs will yield $40,000 per year using the 4% rule. This leaves a shortfall of $60,000 per year.
A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year.
The shortfall is now down to $20,000
|
Source of funds |
Annual income |
|
Retirement account withdrawals |
$40,000 |
|
Social Security |
$40,000 |
|
Need |
$100,000 |
|
Shortfall |
$20,000 |
Closing the income gap
In our hypothetical situation the couple has a $20,000 per year gap between what their retirement accounts and Social Security can be expected to provide. Here are some ways this gap can be closed:
-
- If they have significant assets outside of their retirement accounts, these funds can be tapped.
- Perhaps they have one or more pensions in which they have a vested benefit.
- They may have stock options or restricted stock units that can be converted to cash from their employers.
- This might be a good time to look at downsizing their home and applying any excess cash from the transaction to their retirement.
- If they were business owners, they might realize some value from the sale of the business as they retire.
- If realistic perhaps retirement can be delayed for several years. This allows the couple to not only accumulate a bit more for retirement but it also delays the need to tap into their retirement accounts and builds up their Social Security benefit a bit longer.
- It might be feasible to work full or part-time during the early years of retirement. Depending upon one’s expertise there may be consulting opportunities related to your former employment field or perhaps you can start a business based upon an interest or a hobby.
Things to beware of in trying to boost your nest egg
- Avoid high cost financial products that often do more to boost the bottom line of the financial sales person than that of their clients.
- Likewise, don’t give into the fear mongers peddling financial products like Indexed Annuities or similar products “that can’t lose.”
- Don’t be too cautious with your investments in retirement, inflation is a retiree’s worst enemy.
- On the flip side don’t take on excessive investment risk in an effort to catch up if you feel that you are behind where you need to be.
The scenario outlined above is hypothetical but very common. As far as retirement goes I think financial journalist and author Jon Chevreau has the right idea: Forget Retirement Seek Financial Independence.
Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.
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Given that the majority of people nearing retirement age have far less than $1 million in savings, dramatically reducing spending at retirement is the only hope for any retirement at all. I think we are going to see a lot of people migrating to cheaper rural areas and low cost of living countries to facilitate retirement.
Andy thanks for your comment and I agree with you in many cases. We are seeing a fair amount of flight to lower cost of living areas already whether rural or in other parts of the country or the world.
If you invest the max 17,500 for 40 years you will accumulate 3,500,000 assuming interest of 7%. Using the 4% rule that would account for a 140,000 a year retirement for 30 years without including social security
I’m trying to understand who the heck needs $100,000 per year, *after* he/she retires… What are you spending your money on? You don’t need 2 cars any more because you’re not working. Taxes are way lower because most of your income is cap gains. I assume after working so long your house is paid off (or mostly paid off). What the heck are you blowing $100,000 on then??
Thanks for the comment Mohammad. Fair question. Like much of what I write about this was based upon questions I’ve been asked over the years and folks I’ve worked with. Let me ask you what is a reasonable level of retirement spending in your opinion?
Pretty much every person in the United States can live off of much less than $100,000 per year in retirement if they make the decision to do so. For example, I am a single person (not in retirement). I spend about $4000 per month for everything. And that, in my opinion, is rather wasteful. I’ve been trying to cut back. That $4000 per month includes a mortgage, student loan payment, iPhone plan, cable TV, too many trips to restaurants, and a lot of other spending I probably don’t need. Even at first glance, “frugal me” should get rid of cable TV and switch to Hulu Plus and Netflix/Amazon Prime, move to a lower cost phone plan, and start eating out less. But let’s forget that for a moment and say $4000 for a single person not in retirement is “pretty good” (which would be the belief for most of America, given the way we consume). Let’s double that for me and a spouse. That’s $96,000 per year for two people.
But wait! There are common expenses (mortgage and utilities, for example). Also, by the time I retire I won’t have student loan payments. So expenses for two people will probably be around $60,000 — and that’s with the cable TV, luxury phone plan, etc. Now, granted, I live in a fairly inexpensive part of the country (not super inexpensive, but not bad). Even assuming my mortgage doubled, retirement for two isn’t $100,000 per year.
Now, that’s not saying people can’t get to $100,000 per year easily. Americans spend a lot of money we don’t need to spend. We tend to think “wants” are really “needs.” That’s one of the problem with retirement in America. We’re a very spendy bunch. The biggest problem with retirement in America, however, is that a lot of people just don’t plan for it at all.
Lisa thank you for your comment. First let me say the post was more about going through the math of retirement rather than saying any particular number is right or wrong. That said I agree that for many a comfortable retirement can be had on far less than $100,000 per year. To me people need to be realistic about what their financial resources will support and as you say try to eliminate some of the waste that most of us have in our ongoing spending. At the end of the day a financially successful retirement is about planning.
You should be able to live off of 75% of your annual salary. Most blue collar workers do not make 100k. I understand 100k is just an example. But I am sure average America is more like 60 or 70k.
Scott thanks for your comment.
I think you are forgetting that medical expenses will go up dramatically in retirement. my husband and I are budgeting 30K annually for medical. It is just that expensive. We need insurance for me and my daughter and medicare for my husband. Then deductibles and max out of pocket. Hopefully we will spend less but we need to plan for the max out of pocket plus deductibles to be safe.
I don’t disagree that people can live a nice life on 100k per year. Unfortunately the calculations by the single individual Lisa, above, ignores taxes, which you still pay after retirement – with state, local, federal and real estate means you probably need 35-50% more to have 100k net income – which becomes between 154k to 200k of income needed and a good deal of that is from retirement accounts which are not taxed as capital gains. Yes, you have medicare, but if you “earn” in the range above, you will have a medicare surcharge of $500 or so per month. Further, if you have a family or dependents you might not be as easily on easy street as the writer suggests. To say little of the fact that unless you are in the 1 percent, and 100k is far from that – you are but one disease away from bankruptcy in this country as good as medicare is.
Making your house the way you want. Buying that new car you have done without your whole life. Gong on vacations, buying a camper and traveling, or seeing the world. My inlaws spend 50K a year on vacations around the world. I can’t wrap my brain around it.
Just found this, so I’m late to the party.
The article struck a chord with me because I’m trying to get to $100,000 in annual income during retirement. No, maybe I don’t need it as some (most) have pointed out, but I want it.
I’d also like to do it without withdrawing anything from my assets. In other words, I want my assets to generate $100k in annual income.
I’m about 70% there now with a combination of real estate and P2P loan investing. I just need to find the extra 30% and am looking at dividend investing as part of the solution.
And, of course, I can work part-time to fill in the gaps.
Thanks for the comment and kudos to you!
For a working couple, making over $120,000 a year is not that difficult. My wife and I just retired at 63. We both were professionals and worked around 44 years (yes we both worked in college). SSN combined is a little over $50,000. Pensions combined is $28,000 and 401K income (via annuity) is $42,000. The income will drop when one of us passes but the survivor will still come close to $100,000 a year. I don’t think we are that uncommon.
Jerry thanks for your comment and congratulations on your pre-retirement planning. While I agree that $100,000 in retirement is doable, it can be difficult for many. Pensions are less common than they used to be and far too many folks have not save enough in their 401(k) plans.
Something else for folks to consider that have drawn a line at “what is needed.” Many people have a drive to leave something for others when they die. I hope to do just that, so an agressive income or retirement goal isn’t wrong!
Thanks for your comment Will.
In all the discussion about shortfall, there seems to be the assumption that you never spend the principal, or when you sell your home after you can no longer live independently the equity doesn’t become another source of income. I think this makes people anxious. I have been retired 2 years and to live at the same comfort level pre-retirement I withdraw 24k annually from money market post tax account which is less than my portfolio earns. When forced to make an annual disbursement, I’ll start paying taxes again. While I might want to leave a little something for my daughter, it’s a nice to have but not a need. I think you should divide your nest egg by actuarial tables and then maybe add 5 or 10 years to be conservative and set your spending accordingly. Am I crazy?
Good write up
Thank you.