What it Means to be a Millionaire at Retirement

in Investing by

The question for working Millennials is no longer how to become a millionaire. It’s why you’ll need at least $1 million to retire comfortably. And if you plan to retire by the age of 65, $1 million dollars might not even be enough.

The focus of this blog post is on Millennials, which account for 25% of the total US population. Our subjects are a newly married 30-year old couple with the following profile:

  • Beginning portfolio: $20,000
  • Annual savings rate: $5,000
  • Desired retirement spend: $100,000
  • Social Security: $40,000
  • Portfolio real returns (pre-retirement, after inflation): 6%
  • Portfolio real returns (during retirement, after inflation): 4%
  • Blended tax rate: 15%

The first question:
How long does it take our couple to accumulate $1 million?

Given the above assumptions, it would take our 30-year old savers until they reach 68 to get to a $1 million nest egg in today’s dollars. Granted, any of these assumptions could easily change. For instance, doubling our savings rate to $10,000 a year, our couple would reach $1 million at the age of 59 years. So our first takeaway: save.
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The second question:
How far does that $1 million reach?

The $1 million does not quite get our subjects to their desired $100,000 per year spend. In fact, our 30-year-olds would run out of money by the time they reach 84 (before their life expectancy of 86 and 89, respectively, for him and her). That’s because during retirement, their 6% return is likely to dwindle to 4% as their risk profiles– and investment strategies – shift to become more conservative. Retiring at a “normal” age of 65, they would have been out of money by the time they were 80.

The earlier you retire, the less runway $1 million will give you.

The below chart illustrates this concept further. Using the retirement assumptions outlined above, we show the maximum amount the couple could spend each year during retirement if they retire with $1 million in five-year age-increments. All else equal, as the chart illustrates, the couple needs to delay retirement to achieve their desired goals.


The third question:
How much would the couple need to retire given their goals?

As shown in the chart below, this figure is highly dependent on age and life expectancy. The figure shows the bare minimum that you’d need for retirement with a life expectancy of 89 years given our all of our assumptions.


Simply put, retiring earlier means you need to have a bigger nest egg.

People appear to believe they can handle working later into their lives, especially as life expectancy is becoming longer for those maintaining healthy lifestyles. But to retire comfortably with only a million, you need to be 75. That’s 10 years after the normative American retirement year. To retire at 65, Millennials will need closer to $1.6 million.

The fourth question:
How can this picture change?

First, you can move away from this notion of “depleting” your portfolio if you set a target spend level that is lower than the yield on your portfolio. Traditionally, this has been known as the 4% spending rule – a 4% withdrawal rate is typically less than the yield of a retirement portfolio. Spending less than you make is not a bad rule of thumb.

Of course, our analysis can also be changed by tweaking or adding assumptions; in the real world there are many other factors that impact retirement. Unexpected expenses, such as medical care, could make the numbers even more challenging to reach. On the other hand, ownership of real estate or other assets could brighten the picture we’ve painted.

Similarly, both of our hypothetical portfolios (pre-retirement and post-retirement) have a significant portion in equities, which have exhibited a standard deviation of 20% over time. What this has meant over history is that certain years have been better to retire than others. Returning to our saver couple, if they began their 38 years of saving in 1975 and retired in 2012, they would have nearly double the retirement savings that they would have if their timeline was shifted 4 years earlier. In other words, if the couple happened to have been born 4 years earlier, begun saving 4 years earlier and retired 4 years earlier during the market trough in 2009 they’d have half as much as they would have in our first scenario.

While there’s a long list of factors that complicate any forward-looking analyses, the bottom line is clear: to be comfortable in retirement, you may need more than we think. It’s never too early to think about retirement, and Millennials will be well-served to begin thinking about savings and investing habits that can prepare them for their long-term financial needs.
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Catha Mullen

Catha Mullen

Catha Mullen is passionate about helping people make healthier financial decisions, which is why she joined Personal Capital. Personal Capital helps people live better financial lives by providing technology-enabled advisory services, in addition to free financial software. She's got an MBA from Stanford and AB from Princeton.
Catha Mullen

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  1. Financial Samurai

    It’s really concerning how much more we need in retirement thanks to inflation. In San Francisco, it seems like $5 million is the new $1 million with the way housing prices are going.

    I’m not sure anybody under 40 really expects Social Security to be there for them 100% when they are in their mid-60s either. 70% of payment perhaps, but at this point it seems like getting anything is a win.

    Save on!

  2. Jerry

    The biggest fear with this analysis is that one spends their portfolio down to zero. There’s so many variables to life (expectancy, expenses) that it’s always better to be conservative and leave something than run out.

  3. unclevito

    I just retired at age 58 and was amazed at how little money you really need to live on. You just taylor your life each year to live on last year’s investment returns. For example, in 2013, my portfolio made $56k. That is what I will spend in 2014. I another 7 years I will get medicare and can spend less in health insurance. At age 70 , I will take SS and can spend even less of my savings portfolio. Retirement is NOT expensive.

    • Sam Dogen

      You make a great point about how much less you think you need in retirement. I felt the EXACT same way when I pulled the rip chord in 2012.

    • DaveyLocker

      There is no mention in any of this of the effect of Required Minimum Distributions (RMD). These are taxes that kick in after age 70 1/2, regardless of any retirement age. All sheltered or tax-deferred savings will now be taxed at ordinary income rates.
      The % amount of your ‘stash’ to be included in your post 70 tax return is a function of your life expectancy. The government has been kind enough to tell you what that % is for each age beyond 70. It’s initially 3.65% So if you have accumulated 500,000, add $18,250 of income to your Form 1040. It gets worse in later years.
      None of these advisors ever seem to bring that up.

      • Michael Cocozza

        You make a good point, however, I believe it is misplaced. For individuals like this post describes, even if all of the savings are in a tax deferred account like a 401k or IRA, the amount of withdrawals taken at that stage of life to meet living expenses meets or exceeds the RMD amount. So the taxes would have been paid anyway, and shouldn’t be counted as an additional expense.

        RMD taxation concerns are most often with the wealthy who can afford to not take withdrawals from their IRA/401k until the age of RMDs. That group of people is not who this type of article is written for.

  4. Chas

    Perhaps…just perhaps…we could try a philosophy of living with LESS as we get older? Think about it…by the time you’re ready to retire your children are grown, done with college and gone. Your house SHOULD be paid for. You should be thinking of downsizing with the nest empty. If both of you are retired then one car should also be enough. So…you sell your over-priced McMansion, don’t replace one car and live in a space that two older people can maintain and enjoy without a staff to help them. Now assuming the SS income of 40k and a yield of 4% on your investment (which is another 40k on a million bucks by the way)you’re making 80k a year with NO major expenses except for the annual trip to wherever. How about instead of spending small fortunes keeping up with the Joneses we try to think a little smaller and appreciate the fact that we’re alive with a million dollars in the bank!

    • Sam Dogen

      Sounds like a good plan to me Chas. It’s important to spend and live congruently with our earnings power and assets. It’s when we spend way beyond our means where we get in trouble.

      • Pascual Rico

        Agree. Living within your means is the key to a well-financed retirement. Having 1 million dollars is a good cushion to supplement pensions and Social Security.

    • gordon thomas

      I agree with all that you say except about SS giving you $40K each year. For most Americans that number is more like about $12K. But in spite of that issue, everything else you say applies and is correct. It is amazing how many expenses no longer exist when you retire, kids are gone, house is paid, etc. In fact, most people, out of fear of not having enough money, will continue on working until they become informed or dead. They never get to enjoy the fruits of all the years of their labors.

  5. LDH2O

    I’d been planning on the 4% rule but 12% is the historical rate of return. Now I find my IRA is growing at 10% AFTER I take out my 4%. Nice to have more $ than expected BUT it might have been better to live a little nicer when I was younger.

    • Sam Dogen

      I definitely wouldn’t count on the 4% rule or think about a 12% historical rate of return. How soon we forget about downturns after several years of a bull market. But it sounds like you’ve got more than you need.

      It definitely would be great if we were able to spread out our money more evenly if we knew how much we’d make and when we’d die.


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