If you have ever seen the Austin Powers movies, it is hard to get the image of Mike Myers as Dr. Evil holding the world ransom for 1 million dollars out of your mind. The comedic punchline is that he’s been out of the loop since the 1960’s, back when $1 million was a lot of money. His partners in crime have to bring him up to speed to let him know that he should substantially raise his ransom.
$1 Million used to be enough for most American couples to retire with. A million dollars sufficed to provide a nice income for 30 years, especially on top of your Social Security check. It’s kind of sad to think that being a millionaire probably won’t last most couples for the entirety of their retirement in today’s society.
You may have heard the 4% rule in the financial industry. A gentleman named William Bengen was the first to articulate this rule of thumb. He did a study where he back tested withdrawing 4% of retirement savings accounts each year and adjusting this amount upward at the beginning of each year to account for inflation. It had never run out of money at the end of a 30‐year period, at the time his original study was done. That means using $1 million as the start, you could safely withdrawal $40,000 a year, plus the inflation adjustment. At the end of 30 years you should have at least $1 left in your account.
$40,000 a year, on top of Social Security, may sound like a lot. It would probably provide for the average American couple in retirement today. The problem is that pesky friend of ours, inflation. Will that be enough in 20 years? What if we experience high inflation like the 1970’s, or another major crash?
What’s worse is that inflation on medical needs, especially during your retirement years, is running at multiples of basic consumer goods.
What many don’t realize is that for the 4% rule of thumb to work, you have to hold at least 50% of your investment portfolio in stocks. The bad market years can be nerve wracking, but you need the kick in return they provide in the more dominant good years. As a financial advisor, I try to explain and show the importance of maintaining some of your stock investments.
Of course, everyone’s situation is very different, so $1 million means different things for different people. If you aren’t sure if what you have is enough, or what number you would need to get to, I would encourage you to reach out to us or someone else who is qualified to give you this information.
(Past performance is no guarantee of future results. Advice is intended to be general in nature)