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Retiring on $1 Million? Think Again


Americans with a million dollars or less in savings will probably outlive their nest eggs, says the NYT:

For people close to retirement, the problem is acute. The conventional financial advice is that the older you get, the more you should put into bonds, which are widely considered safer than stocks. But consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds wants to retire. They plan to withdraw 4 percent of their savings a year—a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.

Efforts by the Fed and others to stimulate the economy by keeping interest rates low have produced cheaper mortgages, but they have also hit savers hard. As the report notes, benchmark Treasury yields have remained below four percent since the beginning of the financial crisis. If an ordinary American’s portfolio income is below four percent, withdrawing that much annually, combined with inflation, will bleed his portfolio over time.

Even millionaires in the top eight to ten percent of American households now need to be more careful with their retirement plans. The only safe retirement advice remains: save more than you think you should, and plan to work longer.

With people living well into their eighties and beyond, retirement at 65 is now out of the question for most Americans. This doesn’t have to be a bad thing. Work is natural to human beings and keeps us mentally and physically more healthy. And besides, the social goal of mass retirement in the mid-sixties is simply not possible anymore. All of us need to make the attitude adjustment that 70 or even 72 is the new 65.

That, or we can all just plan to retire abroad.

[Retirement image courtesy of Shutterstock]

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  • wigwag

    Of course, if your same hypothetical couple was invested in an S&P index fund they could take out their four percent a year, still account for inflation and never run out of money. Going back as far as 1930 there are very few twenty year periods where the return on the S&P has not averaged out close to double digits. Measured over the last ten years the average return on the S&P has been 6 percent. Measured over the past five years the return has been 6.20 percent. Measured over the past twenty years the average return has been almost exactly 10 percent.

    Professor Mead gets the take home message all wrong; by all means the more you save the better but investing in bonds to secure a prosperous retirement isn’t conservative, it’s stupid.

  • Anthony

    Caveat: efficient market hypothesis and past performance is not indicative of future results.

  • rheddles

    My attitude may adjust, but I’m not so sure about my body.

  • bpuharic

    Conservatives have done everything they could to blow out the middle class, causing a 30 year wage stagnation, reduced bargaining power, enabling companies to destroy pensions, and having us pay the bills for everything from TBTF to the 401K scam masquerading as a retirement plan. Inequality is massive in this country and it’s going to be interesting to see if, and when, the middle class wakes up

    • Nick Bidler

      What else happened around 30 years ago? Women entering the workforce in large numbers. An increase in the number of workers means less reason to pay them more.

      If you want wages to go up, prevent people from being employed; if you want to prevent people from being employed, raise the minimum wage.

      • bpuharic

        Except women have, as you point out, been in the workforce for decades. Wages haven’t gone up, while income has tripled for the wealthiest 1%. That’s unhealthy for the country

  • lukelea

    An abundance of good part-time jobs is part of the answer. But then you knew I would say that. 🙂

  • Matt B

    I’ve never been convinced that retirement at 65 is a good thing. There’s nothing dignified about playing golf all day. But given these realities, why we allow public servants to retire at 50 with full salary, at taxpayer expense, is beyond me.

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