04-18-2004, 01:04 AM
The Basics Is $1 million enough to retire on?
[url "http://g.msn.com/0AD00005/523109.1??PID=2233269&UIT=G&TargetID=1001213&AN=3220&PG=INVRDL"][/url][font "Arial,Helvetica"][#993300][size 2]Bill and Julie, nearly 60 years old, have $1 million. They hope their hard-earned cash will last until the day they die. Is a million enough?[/size][/#993300][/font]
By [url "http://moneycentral.msn.com/Content/contributors.asp#Woodruff"][#0000ff]Tom Woodruff[/#0000ff][/url]
Bill and Julie Smith, now looking down the barrels of 60, never thought they would be millionaires.
But their IRA account is within shouting distance of those magic seven digits. Will that do it? Do they have enough to retire?
Like many corporate executives in their 50s, Bill was downsized out of his job at Bell Atlantic, so he started a handyman business. He'd had enough of the corporate wars. He rolled over his company 401(k) money into an IRA, and put it into mutual funds. During the bull market, the portfolio did very well.
But we all know a million bucks isn't what it used to be. Bill and Julie are old enough to remember “The Millionaire,” a popular TV series from the 1950s. At the start of each weekly episode, a character named Mr. Anthony, a flunky for an eccentric multi-millionaire named John Bairsford Tipton, gave some unsuspecting soul a check for $1 million. No strings attached. That sum was then enough for most people to fulfill their wildest dreams, and banish their money worries forever.
Bill and Julie want the $1 million to do only one thing: finance their retirement. If they retire at age 60, with $1 million in the kitty, will that be enough?
It's a very close call.
How much do you need to live on?
Of course, how far a million dollars goes depends on how much you need to live on each year and how long you will live. Experts say you need somewhere between 75% and 80% of your pre-retirement income to maintain your standard of living. You can live on less because you'll spend less if you are retired.
The biggest savings: Social Security payroll taxes, work-related expenses and mortgage payments (if your house is paid for). In addition, with reduced income you might find yourself in a lower tax bracket. Weighing in on the other side, you'll face increased expenses for health care and for travel and leisure activities.
If you want to get a good idea of how much you’ll need, we have a [url "http://moneycentral.msn.com/investor/calcs/n_retireq/main.asp"][#0000ff]retirement budget calculator[/#0000ff][/url] to help you find out.
Bill and Julie ran the numbers and here are the results:
[indent]Current yearly earnings (both working): $110,000
Current yearly expenses: $105,000
Estimated yearly retirement needs: $82,500[/indent]That amounts to about 75% of the couple's current income, which is a few points lower than the norm because Bill's ex-employer continues to provide health insurance.
Grossing $82,500 a year from a $1 million portfolio isn't easy. But it can be done -- especially since Bill and Julie aren't worried about preserving any of that money for their heirs.
But inflation could be a killer.
Like compound interest in reverse
Let's say inflation averages 4% and see what it does to Bill and Julie's dream. They will need an income of $104,400 a year in just six years, just to stay even. Another five years and they'll need $127,000 annually. After 25 years of retirement they'll need a whopping $278,300 per year to maintain their standard of living.
Bill doesn't like the idea of taking risks with his retirement portfolio. But he knows that a bulletproof, conservative investment strategy such as government bonds won't work.
Even if his portfolio outpaces inflation by 2% each year, Bill and Julie will either run out of money by age 80, or they’ll have to live on less each year.
However, if Bill and Julie are willing to accept more risk, achieving, say 4.5% above the inflation rate, they will make it to age 88 before exhausting their million-dollar nest egg.
When you stop working, your portfolio can't
Retirees' biggest fear is going broke. Bill and Julie worry about it a lot. They both have parents who lived well into their 80s. Continued good health and future medical breakthroughs could have them living into their 90s. A few years ago, a major insurance company got a lot of mileage out of the slogan: "The only thing worse than dying is outliving your income." That scary slogan has sold a lot of annuities.
An annuity is at least worth considering. You give your money to an insurance company, and it gives you money back each month until you die. The rate of return could be fixed or variable.
What will a million-dollar annuity get you each month? Fidelity Investments sells a variable annuity that uses a 5% standard assumed earnings rate. Based on Bill and Julie's joint life expectancy of 28 years at age 60, the Fidelity variable annuity would start them off at $5,103 per month, or $61,236 per year. As long as they earn 9% or more on their investments, their income would go up at least as much as the inflation rate.
But note: Bill and Julie have to make the investment choices. They pick them from a menu of mutual fund-like portfolios. There are pros and cons to annuities and the annual fees aren't cheap. But they can still make sense for some folks.
Bill and Julie figure that if they were to go the annuity route, they would probably have to wait until age 62 when Social Security payments kick in. They estimate that their Social Security payments, even the reduced payments at age 62, would be around $20,000 a year. Together with a variable annuity, they would be very close to their goal of $82,500 (today's dollars). In addition, they would have two sources of income that would likely go up with inflation.
One caution: While payments for life are guaranteed in a variable annuity, steady income is not. Just ask retirees who invested with variable annuities during the stock market downturn and high inflation of the mid-1970s. It took them nearly a decade to recover their losses. Economists like to say that "in the long run" the stock market will outperform other investments and beat inflation. But as retirees always say, "In the long run, we'll all be dead."
Don't forget the house
Bill and Julie are just about to make the final payments on their house in New Jersey that is worth about $200,000. In addition, they own a vacation condo in North Carolina, worth about $95,000. With Julie's new love of golf, a move to North Carolina is not totally out of the question. They've been thinking that if their assets can't generate enough to meet their income needs, they could always sell the New Jersey house. They've also looked into reverse annuity mortgages.
This is how reverse mortgages work: You hand over the title to your house in exchange for guaranteed payments for a specified period or for your lifetime. This vehicle was created in part for people who needed the income but who did not want to move. It was a way for them to benefit from at least a portion of the equity in their home.
Since Bill and Julie have another place to live, the reverse mortgage isn’t very attractive to them. Julie's attitude: "With the new tax law exempting up to $500,000 in capital gains from the sale of our home, we would rather sell the house and use the assets from the sale to supplement our income."
Well, is $1 million enough?
If your income needs are in the ballpark of Bill and Julie's, $1 million is enough to live on if: [ol] [li]You are willing to manage a diversified portfolio that includes stocks throughout your retirement years, and
[li]You are willing to use all of the assets to live on, and
[li]You believe that Social Security benefits will continue for you, as currently structured, including inflation adjustments, and
[li]You have separately provided protection against catastrophic events, particularly health care, through insurance or other means.[/li][/ol]So are Bill and Julie quitting work at 60? Probably not.
Bill is enjoying his handyman business so much that he's not sure he wants to retire yet. One perk: free coffee and desserts from all of the widows who seem to always have something "broken" around the house.
Meanwhile, Bill and Julie are continuing to feather their nest egg. But they know they can chuck it all any time they want. And they both feel, well, like a million bucks.
[signature]
[url "http://g.msn.com/0AD00005/523109.1??PID=2233269&UIT=G&TargetID=1001213&AN=3220&PG=INVRDL"][/url][font "Arial,Helvetica"][#993300][size 2]Bill and Julie, nearly 60 years old, have $1 million. They hope their hard-earned cash will last until the day they die. Is a million enough?[/size][/#993300][/font]
By [url "http://moneycentral.msn.com/Content/contributors.asp#Woodruff"][#0000ff]Tom Woodruff[/#0000ff][/url]
Bill and Julie Smith, now looking down the barrels of 60, never thought they would be millionaires.
But their IRA account is within shouting distance of those magic seven digits. Will that do it? Do they have enough to retire?
Like many corporate executives in their 50s, Bill was downsized out of his job at Bell Atlantic, so he started a handyman business. He'd had enough of the corporate wars. He rolled over his company 401(k) money into an IRA, and put it into mutual funds. During the bull market, the portfolio did very well.
But we all know a million bucks isn't what it used to be. Bill and Julie are old enough to remember “The Millionaire,” a popular TV series from the 1950s. At the start of each weekly episode, a character named Mr. Anthony, a flunky for an eccentric multi-millionaire named John Bairsford Tipton, gave some unsuspecting soul a check for $1 million. No strings attached. That sum was then enough for most people to fulfill their wildest dreams, and banish their money worries forever.
Bill and Julie want the $1 million to do only one thing: finance their retirement. If they retire at age 60, with $1 million in the kitty, will that be enough?
It's a very close call.
How much do you need to live on?
Of course, how far a million dollars goes depends on how much you need to live on each year and how long you will live. Experts say you need somewhere between 75% and 80% of your pre-retirement income to maintain your standard of living. You can live on less because you'll spend less if you are retired.
The biggest savings: Social Security payroll taxes, work-related expenses and mortgage payments (if your house is paid for). In addition, with reduced income you might find yourself in a lower tax bracket. Weighing in on the other side, you'll face increased expenses for health care and for travel and leisure activities.
If you want to get a good idea of how much you’ll need, we have a [url "http://moneycentral.msn.com/investor/calcs/n_retireq/main.asp"][#0000ff]retirement budget calculator[/#0000ff][/url] to help you find out.
Bill and Julie ran the numbers and here are the results:
[indent]Current yearly earnings (both working): $110,000
Current yearly expenses: $105,000
Estimated yearly retirement needs: $82,500[/indent]That amounts to about 75% of the couple's current income, which is a few points lower than the norm because Bill's ex-employer continues to provide health insurance.
Grossing $82,500 a year from a $1 million portfolio isn't easy. But it can be done -- especially since Bill and Julie aren't worried about preserving any of that money for their heirs.
But inflation could be a killer.
Like compound interest in reverse
Let's say inflation averages 4% and see what it does to Bill and Julie's dream. They will need an income of $104,400 a year in just six years, just to stay even. Another five years and they'll need $127,000 annually. After 25 years of retirement they'll need a whopping $278,300 per year to maintain their standard of living.
Bill doesn't like the idea of taking risks with his retirement portfolio. But he knows that a bulletproof, conservative investment strategy such as government bonds won't work.
Even if his portfolio outpaces inflation by 2% each year, Bill and Julie will either run out of money by age 80, or they’ll have to live on less each year.
However, if Bill and Julie are willing to accept more risk, achieving, say 4.5% above the inflation rate, they will make it to age 88 before exhausting their million-dollar nest egg.
When you stop working, your portfolio can't
Retirees' biggest fear is going broke. Bill and Julie worry about it a lot. They both have parents who lived well into their 80s. Continued good health and future medical breakthroughs could have them living into their 90s. A few years ago, a major insurance company got a lot of mileage out of the slogan: "The only thing worse than dying is outliving your income." That scary slogan has sold a lot of annuities.
An annuity is at least worth considering. You give your money to an insurance company, and it gives you money back each month until you die. The rate of return could be fixed or variable.
What will a million-dollar annuity get you each month? Fidelity Investments sells a variable annuity that uses a 5% standard assumed earnings rate. Based on Bill and Julie's joint life expectancy of 28 years at age 60, the Fidelity variable annuity would start them off at $5,103 per month, or $61,236 per year. As long as they earn 9% or more on their investments, their income would go up at least as much as the inflation rate.
But note: Bill and Julie have to make the investment choices. They pick them from a menu of mutual fund-like portfolios. There are pros and cons to annuities and the annual fees aren't cheap. But they can still make sense for some folks.
Bill and Julie figure that if they were to go the annuity route, they would probably have to wait until age 62 when Social Security payments kick in. They estimate that their Social Security payments, even the reduced payments at age 62, would be around $20,000 a year. Together with a variable annuity, they would be very close to their goal of $82,500 (today's dollars). In addition, they would have two sources of income that would likely go up with inflation.
One caution: While payments for life are guaranteed in a variable annuity, steady income is not. Just ask retirees who invested with variable annuities during the stock market downturn and high inflation of the mid-1970s. It took them nearly a decade to recover their losses. Economists like to say that "in the long run" the stock market will outperform other investments and beat inflation. But as retirees always say, "In the long run, we'll all be dead."
Don't forget the house
Bill and Julie are just about to make the final payments on their house in New Jersey that is worth about $200,000. In addition, they own a vacation condo in North Carolina, worth about $95,000. With Julie's new love of golf, a move to North Carolina is not totally out of the question. They've been thinking that if their assets can't generate enough to meet their income needs, they could always sell the New Jersey house. They've also looked into reverse annuity mortgages.
This is how reverse mortgages work: You hand over the title to your house in exchange for guaranteed payments for a specified period or for your lifetime. This vehicle was created in part for people who needed the income but who did not want to move. It was a way for them to benefit from at least a portion of the equity in their home.
Since Bill and Julie have another place to live, the reverse mortgage isn’t very attractive to them. Julie's attitude: "With the new tax law exempting up to $500,000 in capital gains from the sale of our home, we would rather sell the house and use the assets from the sale to supplement our income."
Well, is $1 million enough?
If your income needs are in the ballpark of Bill and Julie's, $1 million is enough to live on if: [ol] [li]You are willing to manage a diversified portfolio that includes stocks throughout your retirement years, and
[li]You are willing to use all of the assets to live on, and
[li]You believe that Social Security benefits will continue for you, as currently structured, including inflation adjustments, and
[li]You have separately provided protection against catastrophic events, particularly health care, through insurance or other means.[/li][/ol]So are Bill and Julie quitting work at 60? Probably not.
Bill is enjoying his handyman business so much that he's not sure he wants to retire yet. One perk: free coffee and desserts from all of the widows who seem to always have something "broken" around the house.
Meanwhile, Bill and Julie are continuing to feather their nest egg. But they know they can chuck it all any time they want. And they both feel, well, like a million bucks.
[signature]