Can you Retire with a Million? Let’s Find Out!

Setting financial goals is critical when it comes to personal finances, and accumulating $1 million for retirement is an admirable achievement. While a seven-digit retirement buffer is "Singular" and "Measurable," it is not "Adaptable" since it is a binary goal, as we outlined in one of our recent personal finance articles. 

In reality, collecting half a million dollars may be adequate for many people, since they may be able to live for 30 years on a capital of $500,000 while receiving an income of $22,000 per year before taxes, providing that their assets return 4% per year on average (after expenses and inflation). A fantastic goal, on the other hand, may not be "Realistic" (the R is for SMART). 

Human psychology plays a role here: if you set an unreasonable goal for yourself, failing to meet it can be demotivating, especially during times of financial hardship. Saving for retirement is one of the most difficult goals to attain due to the long-time horizon necessary and the various unknown factors, such as your health, how long you will continue to work, and how long you will live after retirement. 

When things become tough, remember that you're running a marathon, not a sprint, and you may stop at any time. So, let’s see the 4 basic steps which will help determine whether or not you could retire with a million dollars!

1. Generate income

According to David Blanchett, director of retirement research at Morningstar in the United States, a "single" money goal may not be the most effective way to plan for "off" years. According to him, a more personalised plan based on current income and the amount of money one desires to spend in retirement should be adopted. "How much money do you require in light of your existing circumstances?" he asks.

However, it may be obvious, but if you earn a lot of money, you will need a lot more money in retirement to maintain your current way of life. Because interest rates and government bond yields are now so low, a seven-figure capital will not be sufficient to finance a luxurious lifestyle.

As Blanchett puts out, the more money you make, the more cash you require, which may imply that famous million isn't enough.

2. Stay invested

Even if you are fortunate enough to retire with a one-million-dollar starting capital, not everything is simple. Today's retirees have a plethora of options on how to invest their assets. Given the ability of equities to beat cash and bonds, as well as the present low rates, many retirees now opt to continue investing in the stock market even after they stop working.

Based on current savings rates, if you have $1,000,000 in cash instead of a pension plan, you may make as low as $1,000 per year if you put the money in an account that yields 0.1 percent interest. What if one taps into their savings as well? In principle, a million dollars would last 40 years if $25,000 were removed each year. 

But that doesn't account for inflation: if withdrawals were doubled every year to keep up with the cost of living, it would only last 20 years.

3. The 4% rule

Financial consultants have traditionally employed the "4% rule" to guarantee that you outlast your savings: the idea is to extract 4% of the value of your portfolio in the form of income each year (that is, $4,000 for every $100,000 saved) and adapt this proportion to inflation each year. This allows you to retain your money in the stock market, which should outperform inflation in principle.

It's a good starting point, but given low-interest rates, longer life expectancies, and stock market volatility, you may need to withdraw a lesser amount. The 4 percent guideline lends itself to some basic arithmetic: a 4 percent expenditure plan necessitates a 25-times-larger yearly spending budget (4x25 = 100). 

If you know you plan to spend $50,000 per year in retirement, multiply that figure by 25 to get a portfolio size of $1.25 million. For those with a long enough time horizon, retiring with a million dollars may be more feasible than you think. But keep in mind that the real purchase power of a million dollars in, say, 40 years will be significantly lower than it is today. 

Nowadays, it's more normal to earn your retirement income from a variety of sources, including personal savings and a retirement pension (although public pensions tend to decline as the population ages, productivity gains decline, and governments make short-term decisions). This means that combining some or all of these aspects can result in a comfortable retirement income without the requirement for a seven-figure piggy bank.

4. Step by step

According to Christine Benz, a Morningstar personal finance specialist, the choice to retire should not necessarily be based on accomplishing a financial objective. As the Covid-19 epidemic has demonstrated, the quality of life is just as crucial as the amount of money.

"Instead of seeking for a one-size-fits-all answer to help overcome a savings gap, how about considering a few wise tactics, such as being prepared to decrease your quality of living in retirement, working longer, and investing a little better," he says.

"The benefit of taking multiple modest actions rather than depending on a single action is that if one of the variables does not turn out as planned, you may still salvage your strategy."