A New York Times article discussed that a $1 million retirement nest egg isn’t what it used to be. While this is more than 90% of U.S. retirees have amassed, $1 million doesn’t go as far as you might think. That said I wanted to take a look at what it takes to provide a $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’ that was developed many decades ago, although like any rule of thumb it is just that, an estimating tool. While it is a useful estimate, do not depend on this rule alone, build a comprehensive financial plan for your retirement.
Using the 4% rule as a quick ‘back of the napkin’ estimating tool allows us to see how someone with a $1 million in their 401(k) and any other retirement accounts might help get them to their hypothetical goal of $100,000 (before any taxes) per year. Note this is not to say that everyone needs a $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
So how can you make up this potential shortfall-
- Do you have you have any assets outside of your retirement accounts?
- Any life insurance not needed anymore? There might be cash value.
- Do you or your spouse have any pension(s) in which you will receive benefit?
- Have you ever received any stock options or restricted stock units from a current or previous employer that can be converted to cash?
- This might be a good time to look at downsizing your home and applying any excess cash from the transaction to your retirement nest egg.
- Are you a business owner? There might be some value from the sale of the business when you are ready to retire.
- If realistic, perhaps retirement can be delayed for just a couple of years? This allows you to not only accumulate a bit more for retirement but it also delays the need to tap into your retirement accounts and builds up your 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 reconsulting opportunities related to your former employment field or perhaps you can start business based upon an interest or a hobby.
- And finally, if none of the above applies then a possible downward adjustment in your retirement income might be needed.
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.” These products are typically very expensive and do not perform as well as the “hypothetical” illustration shows. The devil is in the details.
- ”Don’t be too cautious with your investments before or in retirement, inflation can and will eat away at your future purchasing power. Taking the proper amount of risk is critical to your investment success.
- 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. Save more and make sure you understand what is in all of your investment accounts.