Is One Million Enough for Retirement?

Speaker 1 – 00:00
Is a million dollars enough for me to retire on?
Speaker 2 – 00:03
Is that million dollars in a pre tax?
Speaker 1 – 00:05
I think 1 million could be more than enough for one person or for a certain family. And then 1 million can also be
not nearly enough for what some people might need. Where are you living? Do you still have any debt that you’re
paying off? Do you still have a mortgage or car payment or any loans? What are your health care costs?
Speaker 2 – 00:23
If you’re retiring and you have pre tax money on the balance sheet, you’re retirement, whether you like it or not, is
going to be influenced and impacted by tax code.
Speaker 1 – 00:31
Those are things that are technically outside of your control, but you can plan for before you get to that retirement
point.
Speaker 2 – 00:36
I think everything’s a trade off in financial planning. So it’s like really what are your goals, intentions? How much do
you want to use this? How important is it to leave something for kids, charities and so on and then that the rest of
the plan kind of follows.
Speaker 1 – 00:49
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And I think that’s one of the toughest job as an advisor is. So today, Chris, we’re tackling one of the most searched
questions that we see in personal finance. Questions that we get asked a lot by clients. Is a million dollars enough
for me to retire on? So we’re going to unpack what that means. What does 1 million really get you and some of the
factors that you need to consider before you think about pulling the trigger on retiring with that number. And I think
this starts with, I think people fixate on a number. Oftentimes I see like retirement calculators on someone’s 401k
website that they spit in their income, their assets, what they’re saving and then it’ll populate. Just a big number
that I think gives people almost like a goal to reach to be working towards.
Speaker 1 – 01:43
And people feel like they need to wait until they get to that number of assets before they feel like they can retire.
But Chris, there’s a lot more that goes into it than just getting to a number.
Speaker 2 – 01:51
For sure, we’ll talk about a lot of that today, of course. So the big one is how is your money spaced out? Is that
million dollars in a pretax 401k is in a Roth IRA, a brokerage account, probably a mix of all three of those. And
those different tax treatments are going to ultimately dictate a lot of what your options are. So yeah, let’s dive into
it.
Speaker 1 – 02:10
Yeah, I think, yeah, I just think just those things can be just overly Generalized, I think 1 million could be more than
enough for one person or for a certain family. And then 1 million can also be not nearly enough for what some
people might need. It all depends on your goals, your spending, how your health is, how the money is structured.
Exactly. So, so Chris, what does 1 million realistically get you once you pull the trigger and say, hey, I’m going into
retirement?
Speaker 2 – 02:36
Yeah. So if you just Google that, you’ll probably see something called the 4% safe withdrawal rate. That’s kind of
the industry standard of what can I take out every year without depleting the portfolio? So roughly 40,000 is the
starting, like back of the napkin number there, but gotcha.
Speaker 1 – 02:54
So Social Security, if we assume married couple, they’re getting between 40 and 50,000 a year from Social Security,
plus another 40 from the safe withdrawal rate on a million bucks, you’re looking at somewhere between 80 to
90,000 of income that you’d be living on. Is that correct?
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Speaker 2 – 03:11
Yeah. High level? Yeah, for sure.
Speaker 1 – 03:13
Perfect. So again, for some people that might be more than enough. For others it might not be enough. So a lot of
context matters there. Where are you living? Do you still have any debt that you’re paying off? You still have a
mortgage or car payment or any loans? What are your health care costs? Do you have a plan for assisted living or
skilled nursing if and when you needed like long term care or there’s a health care event, you know, how is your
money structured? Is it, is there 1 million in a Roth IRA or is it 1 million in a traditional IRA? That makes a big
difference. So what are some things, Chris, that you can control in your retirement and things that maybe you can’t.
Speaker 2 – 03:52
I think the most obvious is just discretionary spending. So I think all this starts years leading up to when the plan
goes live. So a lot of our discussions with clients and in the years leading up to full retirement, we’re really trying to
get dialed in on the budget. Like, what are you said a little bit of that. Like what are your fixed bills? Do you have a
mortgage liabilities? Those we can’t control as much. But looking at where your money’s going right now, while you
have a paycheck, where’s that income being directed to? Dining out, travel. We want to make sure to best that we
can to maintain the same lifestyle while you’re working versus not working. So I think starting there with
spending’s so important for sure.
Speaker 1 – 04:31
And then the things that I don’t Think you can have a great control once you’re in retirement? Are inflation so you
know you have no real control over that? How is your 1 million structured? Is it invested in a way that’s going to
outpace inflation or is it conservative that could potentially be eroded by purchasing power? What are the task the
tax rates that you are experiencing when you’re in retirement and then how is your money structured? So are taxes
higher than when you were saving that money and is money in a pre tax environment? Well, you’re realizing
ordinary income tax when you take money out of a traditional IRA as opposed to a Roth IRA that’s completely tax
free. So how is your million dollar structured? And then what’s the market doing?
Speaker 1 – 05:10
Do you have a safe bucket of money that you can turn to if and when the market is down that you could pull from
to avoid selling equities at a loss? That’s, that’s the concept of sequence of returns risk that we need to have a lot
of proactive planning for to make sure that we do have a bucket of money that is technically safe. Whether that’s
cash, bonds, cash value and life insurance that you’re able to turn to if and when the market does go down once
you’re in retirement. So those are things that are technically outside of your control but you can plan for before you
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get to that retirement point.
Speaker 2 – 05:41
Right? Yeah. I think the two biggest question marks are taxes. What are taxes going to be? Not just this year, but if
you’re retiring and you have pre tax money on the balance sheet, your retirement, whether you like it or not, is going
to be influenced and impacted by tax code because every single one of those distributions, it’s now taxable as
income. So that I think is the number 1 and then 1A and 1B market returns. So to your point, having a system set
up and we can dive into that maybe of how we would allocate if it’s a million bucks, like how should it be structured
based on your spend? Absolutely.
Speaker 2 – 06:15
But yeah, I think those are the two big ones that are out of our control and then shifting focus to what can we
control to increase our probability of success over the long term?
Speaker 1 – 06:25
Yeah, items that are also in your control that aren’t really going to show up in a retirement calculator are your goals
and your priorities. And I think that’s probably the first thing that you need to get a handle on before you enter into
retirement and before you start taking distributions from your accounts is helping detail what’s most important Is
leaving a legacy for your heirs. You know, where does that rank for you? How important is that for you?
Speaker 2 – 06:50
Right.
Speaker 1 – 06:50
What about financial independence? Enjoying your lifestyle, taking the trips you want to take, doing the travel you
want to travel. Like, how important is that once you’re in retirement? And then the third thing would be
philanthropy. Are you charitably inclined? I think it’s important for clients to really think through those three buckets
and almost assign, you know, scale of one to 10. Well, I think leaving a legacy is a 10 out of 10. Or, you know,
enjoying my financial independence, that’s a six out of 10. You know, assignment numerical values to those and
help prioritize those goals because that can really help dictate how much you’re spending and how much you’re,
how much.
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Speaker 2 – 07:26
You’Re not for sure. And declare whenever we walk people through that, like a 10 out of 10 for financial
independence would mean in our example, if you have a million dollars, I mentioned the 4% withdrawal rate. What
we do, it’s, we take a dynamic approach to it’s 3 to 5%. So that means anywhere we could spend from 30 to 50,000
per year on a, on average. So if financial independence is a 10 out of 10 and a client tells us that means that we
want to nudge them and say, if you’re only spending 30 this year, you told us earlier in the year, it’s a 10 out of 10
for you to maximize this. How are we going to spend to get up to 50 in that example? So I think everything’s a trade
off in financial planning.
Speaker 2 – 08:05
So it’s like, really, what are your goals, intentions, how much do you want to use this, how important is it to leave
something for kids, charities and so on, and then that the rest of the plan kind of follows those goals, but
absolutely just.
Speaker 1 – 08:18
Highlighting a couple lifestyle scenarios. So if you have a million dollars, you’ve gone through your goals, you’ve
established what’s most important and you’re ready to start taking distributions. Well, the question becomes, is a
million dollars enough to sustain my lifestyle? It’s going to come down to a few factors. So if you’re in a low cost of
living area, you’re, you’ve prepped your retirement budget, you feel comfortable spending 70 to 80,000 a year, you
know, a million dollars, that could be more than enough, right? If you still have Social Security, you don’t have any
debt payments, you’re not planning any huge trips, that is a safe withdrawal rate, you’re within that 4% distribution
rate and you can then focus on some of the goals you may have mentioned. So you know, is legacy planning,
charitable giving, are those things important to you?
Speaker 1 – 09:05
If you have those boxes checked, a million dollars could be totally sufficient for that lifestyle that you’re planning on
living. On the other end, if you’re planning on enjoying, you know, financial independence like you said, if that was
more of a 10 out of 10 traveling, wanting a second home, gifting to family, then maybe a million dollars is not
enough because you might be taking yourself outside of that 4% rule or safe distribution rate. So it’s really
important to identify those goals before you enter into retirement so you can be realistic with what you can spend
and what you can’t.
Speaker 2 – 09:40
Yeah, to your point it could look completely different person to person. I think it would be helpful to talk through
some cash flow scenarios. So I think oftentimes what we’ll see is a lot of people nearing retirement. Now it’s more
common for those people to have some sort of traditional benefit pension versus nowadays those are pretty much
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non existent unless you’re like a teacher, government worker or so on. But let’s say for example if a pension, you
know, you worked your whole career and now this pays you an income stream, let’s say it’s twelve hundred dollars
per month is you know, somewhere in the range what we typically see for these kind of pensions. And then it could
be all over, you know, depending on your earnings, the job it could be different.
Speaker 2 – 10:20
But for this example, let’s say 1200 if you’re married, Social Security is usually, you know, if you’re anywhere from 2
to 4,000 per month depending on your earnings. So let’s say if you’re married combined 6,000 is coming in and
then our example for the 40,000 per year withdrawal, that would work out to 33. 33. So in this example you’re over
10,500 per month. So it’s and to your point, if you’re depending on your cost of living in your area, your budget that
you know could be enough for some and again not enough for it. So again it depends on the, your individual
situation. But definitely million dollars could be enough ultimately is going to depend on what other tools. If those
are income streams that you have at your disposal and then what’s your spending like?
Speaker 1 – 11:04
One of the biggest I think hurdles for someone in this net worth range is what happens if you retire and then the
market immediately goes down. So if you don’t feel like you have that huge wiggle room and the market’s down
maybe the first two, three years of your retirement, what are you going to do? Do you have a backup plan to take
your distributions from if you need them to avoid selling any equities while they’re at a loss? So this is the concept
of sequence of returns risk that we mentioned a little bit earlier.
Speaker 1 – 11:31
At ewa, we have a, a safe money strategy for our clients to always keep between 7 and 10 years of your spending
gap in assets that are not going to fluctuate with the stock market, whether that’s cash, money market funds,
bonds, cash value inside of life insurance, things like that, to always ensure that if there’s a seven to ten year
window where the market is down, we want to have a place to pull money from without locking anything at a loss.
So for example, if someone’s lifestyle is $90,000 a year, if you’ve gone through your budget and that’s what you
need to spend, let’s say you’re getting 50,000 a year from Social Security.
Speaker 1 – 12:09
So 90 minus 50, 40,000 is the gap that you’re in your head thinking, okay, I need to take 40,000 a year out of my
portfolio every year in order to maintain my 90,000 a year lifestyle. Seven years worth of that 40,000 is 280,000. So
in this example of I have $1 million in my account, well, we’d want to have between 25 and 30% of it in safe assets.
Now, whether that’s cash, you know, whatever the asset is, that makes sure that we have that buffer in place if and
when the market goes down. Because if we don’t and we have to sell equities at a loss, that’s one of the biggest
hurdles or risks that you can have in your portfolio is not having that backup plan when the market goes down and
to dive.
Speaker 2 – 12:53
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A little deeper into that the next one year. What we typically do is that’s already taken off of the table. It’s usually in
either cash or government money market securities. So it’s very accessible and liquid. It’s not going to be volatile.
So in our example, if you’re taking 40 per year out, that 40,000 would already be off the table and it’s not in stocks
or anything like that. And then years six through nine, if we’re doing seven years or 10 years of that backup, that’s
where we’re looking at Treasuries, corporate bonds, things that aren’t going to be as volatile as an equity portfolio
will be. And that just Allows us to.
Speaker 2 – 13:29
Now, as the years go by, we’re sending the clients the money from the cash and then as that seven year backup
starts to deplete, we cherry pick from the portfolio what equity positions have done well. And we just always make
sure that safety net is constantly getting replenished. Because if we’re, if we get that mix correct ahead of time,
like keeping that 280 in, in bonds or 300, many of our clients carry above that just for the peace of mind. But if we
get that mix right, we could run into down markets for several years. Hopefully that’s not the case. But five, 10
years of a bad market won’t derail your retirement if we get that mix correct up front.
Speaker 1 – 14:06
Yeah. And that goes back to the retirement calculator that we had talked about in the beginning. I think if you’re in
your 60s or 70s and you Google what allocation should I be in retirement, it’ll tell you need to be 50 and as you get
older, more and more into bonds. Well, in this example, seven years worth, I mean that’s, you’re around a 30, you
know, 70, 30 investor equities to bonds. You know, you’re selling yourself short on a lot of expected potential
return. Yeah, if you are too conservative early, that kind of goes back to one of the other risks that we talked about
is just inflation in longevity. People are living longer.
Speaker 1 – 14:39
So we want to see our financial plans sustained all the way through age 95, even age 100 for our clients before we
can offer our best interest opinion that you’re almost safe to retire as we want to see that longevity all the way
through 100. And if you’re too conservative too early, there’s no guarantee that you’re going to be able to outlive
inflation.
Speaker 2 – 15:00
Yeah, I definitely get some kickback on that longevity assumption sometimes. But we talked through it and it’s all
just to make sure you’re protected. But I like doing that, like even on meetings I’ll pull it up. But just to show people
like how backwards I think it is in most cases, like I’ll share my screen and Google like what, how should I be
allocated at age 70? And it’ll be like you said, a very conservative number. But we don’t base it off of age at all. It’s
entirely dictated by what are you going to spend? Because let’s say you’re married and both people have pensions,
both are claiming Social Security and that gap is only 15,000 per year, not 40. But you still have a million dollars.
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Speaker 2 – 15:40
That allocation shouldn’t be the same as somebody that’s spending 50 per year because it should all be tailored to
what we always say. What’s the job description of your portfolio? And if for somebody it’s to replicate 40,000 to
supplement pension, Social Security, then that’s the job Description. If it’s 10,000, then we work around that. So it’s
definitely all tailored and not based off your age. That’s kind of the lazy way to do it in our opinion.
Speaker 1 – 16:05
Absolutely. The other risk that we had to discuss was just healthcare and long term care planning. So if you had
that 90,000 a year spend in your head, you knew Social Security was covering 50, you had in your head, okay, I’m
taking out four day a year from my portfolio, I have my safe money, I’m good. The problem becomes do you need
assisted living, skilled nursing for an extended period of time? The average cost of a stay is anywhere around
10,000amonth and then the average stay is around three years. So that really is an expense that maybe you don’t
have planned for. And can your portfolio withstand the stress of taking out that additional cost to help sustain
that? So really that requires a lot of foresight planning.
Speaker 1 – 16:47
So maybe in your 40s and your 50s you’re planning for potential long term care, whether that’s via a standalone
long term care insurance policy. We don’t see that a lot. Right. Right now just because those policies are use it or
lose it. So you could be paying premiums on a long term care insurance policy for 20 to 30 years and if you never
need the care, there’s no benefit to show for it. What we are seeing now is long term care being a rider on a
permanent life insurance policy that allows you to use the death benefit of the policy itself to help cover long term
care costs tax free with no market ties as well.
Speaker 1 – 17:24
So those are the things that if you want to have a plan for long term care and it’s not so much a user loser
proposition, that could make a lot of sense. But again, that’s requires planning in your 50s. That’s not something
you necessarily can wake up at 65 and say, I’m ready to take that plan.
Speaker 2 – 17:38
Yeah, and there’s also like on the, I guess also the risk management front from trust planning, there’s certain types
of strategies that you can do to protect assets. If you’re, you know, going the Medicaid route in terms of what you
can do with your house investment accounts and so on. But I think for the scope of this episode, we just wanted to
focus on the retirement income planning standpoint of, you know, how can we, what can a million dollars replicate
for Chris?
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Speaker 1 – 18:04
Can you walk through. So if you have a million dollars, it’s important the different structures of how that 1 million
can be structured, whether it’s a million dollars in a Roth ira, a million dollars in a traditional Iraq, million dollars in
an investment account. Could you just walk through the tax implications of what that means?
Speaker 2 – 18:20
Yeah, the most common is going to be a traditional ira. That’s where most people end up accumulating the bulk of
their, you know, at least in this asset range, the bulk of their bulk of their savings and. Right.
Speaker 1 – 18:31
So that could be like an old 401K that you attributed to, that you rolled out once you left.
Speaker 2 – 18:34
Yeah. Right. And so if you think about how that 401k or 403b, whatever the employer account was while you were
working, if you’re funding pre tax, those contributions are reducing your taxable income during working years. So
because of that tax benefit now when you go to take the money out, it’s all subject to income tax, 100% of it. If you
take out 10,000, then 10,000 shows up on your 1099 R and that’s reported to the IRS. So really, if you have a million
dollars in a pre tax traditional ira, you really have to look at that like, what’s the net, like, what’s the actual value of
that? Because if your effective tax rate’s 15%, that’s really worth $850,000. Or if you’re, if taxes go up and your
effective tax rate’s 25%, then it’s only worth $750,000. That’s what we typically see.
Speaker 2 – 19:19
And those accounts also have required minimum distributions that start anywhere from 72 to 75 right now. So
whether you need the money or not, once you hit those ages, the IRS mandates that you start taking that money
out. And if you don’t, there’s a pretty severe penalty.
Speaker 1 – 19:34
Yeah, that kind of goes back to that sequence of returns risk that we had talked about is once RMDs kick in, you
have to take the money out. There’s no real flexibility there. So if the market is down and that’s your only source of
taking distributions, you’re locking in losses and that could cause a lot of stress to the portfolio.
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Speaker 2 – 19:51
And so this also ties into like where, what kind of funds are we holding? Like where are we holding our stocks?
Where are we holding our bonds? So if we look at a pre tax ira, every distribution is going to be taxable. So if we
have fund A that is aggressive and we expect it’s going to do 10% versus we have a bond fund that’s going to do
4% and we need to hold 300,000 or so in bonds, we’d rather hold those in the IRA because the interest isn’t going to
be taxable year to year, only the distributions. And we’d prefer to have the higher yielding assets, growth oriented
equity funds and a Roth IRA where all the growth is tax free.
Speaker 2 – 20:29
So the asset mix that you have is extremely important from the tax standpoint and also in terms of where are we
holding these different assets, it can make a huge difference. Yeah.
Speaker 1 – 20:39
What are some strategies that we work clients with in this range, either if they’re in low income years or if the
market is down. What are some things that we’re doing with clients in this range?
Speaker 2 – 20:49
Yeah, those that have big IRAs, we’re looking to do Roth conversion planning, especially during a down market or if
you’re in a lower tax bracket year. Because let’s say you’re in your early 60s and you have a big IRA. If you do
nothing and your IRA grows, let’s say it’s $1 million whenever your RMD starts, that required minimum distribution
is going to be about 41,000. That may or may not be more than what you actually need to sustain lifestyle. Like
let’s say you only need to spend 20,000 from your portfolio. Now this RMD surcharging our taxes by an extra
21,000. So if we did that Roth conversions earlier, before those RMD years, we can in turn that’s going to reduce
the IRA balance. So your RMD is going to go down over time.
Speaker 2 – 21:34
And so there’s an added benefit if we do it during a down market because let’s say the conversion target’s $20,000
and you have a fund that you own a thousand shares of, that’s worth 20,000, then the market goes down and you
still own the thousand shares, but now it’s only worth 12,000. We can grab it while it’s down, move it to the Roth
and 4,000 shares moves over, but your tax return only shows a conversion at 12,000 instead of 20, which was the
value before it went down. And now all of the rebound from the conversion here on outsole tax free. So that’s kind
of some offensive planning that you can do even when the market’s in a bad spot. But again, all depends on the
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asset mix. Some people were doing heavy conversions for, others were not doing them.
Speaker 2 – 22:18
So it all just depends on going back to what’s the job description for the portfolio.
Speaker 1 – 22:23
Exactly. And I think that’s one of the toughest job as an advisor is keeping someone’s financial plan aligned with
the goals that they’ve highlighted were most important. Balancing like permission to spend almost versus
prudence. I think that can be a difficult balance to strike. But as an advisor, it’s your job to and our job to make sure
that our clients are our clients. Distribution strategies are aligned with what they identify was most important.
Speaker 2 – 22:50
Yeah, I’d say for the most part, like we’re fortunate that usually the best savers are the worst spenders. And being
that we’re a wealth management firm, we generally work with good savers. So I’d say a lot of those discussions are
like nudging to spend more just because it’s uncomfortable. Because you go all these years of building the habit of
saving and then you get to retirement, your income stops, you stop saving and now you’re pulling from saving. It’s
so uncomfortable. So a lot of the times, especially early on, where a lot of those conversations are like this
money’s it’s live now, let’s use it. But I’m sure there’s a tipping point there where, you know, sometimes we’re having
the other discussions, but for sure.
Speaker 1 – 23:30
So just circling back to close, the question that we asked was is $1 million enough for you to retire? So I think a
basic checklist of questions you should be asking yourself or either with your financial advisor to determine if you
can retire with a million is number one, have an idea of what percentage of your 1 million is in Roth versus pre tax
versus brokerage. Getting an idea of what those tax implications are for those three different distribution
strategies. Second question is do I have safe money? Do I have a bucket that I’m prepared to take from if and when
the market goes down? Have you ranked your goals? Do you understand what your legacy goals are if you have
them, what your spending goals are if you have them? Make sure those are all written out and pretty clear.
Speaker 1 – 24:16
Have you run projections for what your taxable income will be and what your potential RMDs look like once you
turn into your 70s? Do you have a good plan for those? And this. And the last thing would be do you have a
strategy for health care you know, do you have a plan for if and when you need long term care? If you can answer
all those questions, yes, you’re retiring with a plan, and that’s most important. You’re not getting to a certain
number and closing your eyes, crossing your fingers and hit and play. You have a plan for some of the, some of the
hiccups that can come up. And from that standpoint, you’re probably ready to go.
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Speaker 2 – 24:50
Yeah. Well said, Chris.
Speaker 1 – 24:52
Anything else we missed here on your end?
Speaker 2 – 24:54
No, I think that hits on everything. Perfect.
Speaker 1 – 24:56
Well, if you have questions about your retirement strategy or want to talk through any of the points that we
discussed in this podcast, feel free to reach out for a free consultation.