Is $1 Million Enough to Retire?

A senior financial adviser at Ameriprise says it's enough for only a modest retirement

June 16, 2009 RSS Feed Print

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Whether it is five or 25 years away, many of us share the same nagging question about retirement. How much money will I really need? Geri Pell, a senior financial adviser for Ameriprise, says the answer depends on where you live and what type of retirement lifestyle you hope to have. U.S. News asked Pell for some strategies to help figure out your retirement needs. Excerpts:

How do you know if you're saving enough for retirement?
Most people don't know. The only way you can know is by figuring out what kind of retirement you want and how much money you will need. Many people are feeling very out of control and people have more doubts and more fears. Sitting down and making decisions and developing a plan takes so much stress away from people.

What needs to be factored into your calculation?
One of the things that is very useful to do is figure out what you are going to spend in retirement. Consider what kind of lifestyle you want in retirement, inflation, what your risk tolerance will be now and in retirement, what rate of return you might assume on your assets, and how long you will work. Also, do you have a pension? How much will you get from Social Security? Will you take on a second job or do some consulting?

How do you figure out what your risk tolerance is?
The big overall question about risk tolerance is, for you personally; would you rather sleep comfortably every night and at the end of 20 years have a 5 percent rate of return or have some bumps in the road and possibly get an 8 percent rate of return that is not guaranteed? People will answer that question differently depending on what cycle the market is in. It's almost like a doctor diagnosing what your real health condition is. If we get it right you will be a good investor. There is an enormous amount of psychology involved. We've all come to understand how wide the market swings can be. If you know that an 80/20 mix can go down 40 percent and you can't live with that, maybe you have to switch to a different mix. And then you need to understand that you are limiting the up side as well.

What span of time should you estimate you will live?
I usually start off using 95. You get a lot of different reactions from people, but life spans are expanding. If you plan for 80 and live until 87 you can't come back to me and say I ran out of money. You need to plan for longer than you think you will live.

What percentage of your salary should you aim to save?
If you have children in college or in private school you might aim to save 10 percent of your income. But in the time when the kids are out of the house and before you retire you may want to bump that up to between 20 and 25 percent. It really depends on your situation. You should always save in your 401(k) at least up to the company match. You certainly need to be saving enough money to have a cash reserve for emergencies.

Is $1 million enough to retire comfortably?
For a modest retirement in most places in the country that may be enough money, but it probably would not be enough money in San Francisco or Los Angeles or New York City. For example, $1 million could produce about $40,000 a year. And then if you get $20,000 from Social Security that would be $60,000 without any other income. There are people in retirement who spend only $3,000 a month because they don't have a mortgage, they have a low cost of living, and they go to the early bird specials. If before you retire you are earning $200,000, then you might have to downsize a little bit.

How can you keep your nest egg safe after you retire?
The most important thing is to get your emotions under control and not make decisions based on emotions. When the market is going up people can't wait to throw money in and when it's down people pull their money out. In life there are things we can influence and things we can't do anything about. What I tell clients is that there are only four things you can control about your financial picture: how much you spend, how much you earn to an extent, your emotions, and what you do with the money that you have. You can't control the market, but you can control the decisions you make about the money that you have.

Tags:: Ameriprise Financial,; retirement

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I have made it to the 1 Million saved benchmark, and the cost of Heath insurance and up front deductions make it hard to consider retirement, It seems difficult to retire and carry large health insurance cost. We need to get medical costs in the U.S. under control. Or we will all be flying to india, or thailand for major health care
needs. This is the one issue that prevents individuals from being able to retire on less money.

stillworking of CO 5:23PM April 19, 2012

The funny thing is that a "modest" retirement will be just fine for most Americans.
In 2007, the median annual household income was about $50,000 according to the Census Bureau. That's figure is "household income." The average household size in America is about 2.5 persons. So let's do some math. First, let's assume that your household in retirement will be only 2 persons (that .5 of a person in your average household has gone off your payroll). That means an average household perhaps would have spent spent only 80% of the $50,000 annual household income on themselves (this number is probably less). That would be only $40,000 per year. Now, many "experts" say you'll need 80% of your pre-retirement income in retirement (a number which I think is way too high). But let's assume these "experts" are correct. Perhaps then, the average retired couple would need only 80% of the $40,000 to maintain the same standard of living in retirement. That, would be $32,000 a year. Then you get to subtract from that figure all the expenses you won't have after you're retired, like income taxes, FICA deductions, retirement savings, work related expenses, etc. Sure, some things will cost more, health insurance for one, and you'll need a lot more if you're retiring in an expensive place like New York City or San Francisco. But you get the picture.
So it's true that you can retire with "only" a million. And the good news is that many folks will be able to retire on a lot less.
Jonathan D. Edelfelt, author of Who Said You Need Millions? Retirement Strategies for the Rest of Us.
www.whosaidyouneedmillions.com

Jonathan D. Edelfelt of TX 6:58PM September 21, 2009

I think the writer is correct. Purchasing power and cost of living dictate that you need more to retire since people are living longer. Can't depend on interest and SS (for the common folk)anymore. And thats without a mercedes or a beemer. Those that disagree have not given serious enough thought to their future. Probably some "Carpe Diem" hippy b.s., but they're in for a rude awakening in the distant future.

ELI of CA 6:33PM August 19, 2009