Do I have enough for retirement? Is $2 million enough to retire?
To answer the question, “is $2 million enough to retire?” depends on a variety of factors, but most importantly, how much income you will need the portfolio to generate in retirement. For some people, $2 million is plenty of money, for others, it’s not nearly enough depending on lifestyle needs.
At the beginning of the financial planning process, your financial advisor should take an inventory of your specific goals. This is considered goals based financial planning. If a financial advisor starts with questions about risk, they are building a risk based plan which can ultimately be flawed and not work over the course of a 30 year retirement. In our experience, financial planning should be goals based where your financial advisor understands what you are trying to accomplish.
What are your goals?
You may have a list of items you’d like to accomplish or some larger bucket list items you’d like to achieve in retirement. Even retirement itself is a goal - at what age would you like to ultimately retire? Other common goals include:
Your retirement date and age - when do you want to retire?
Do you plan on travelling a lot in retirement?
How much money will you need per month in retirement?
Would you like to help grandchildren with education expenses?
Are there any charities you’d like to support?
How is your health?
Do you plan on relocating to a different state in retirement?
Will you purchase a new home or secondary vacation home in retirement?
Once we understand your goals, we can help you prioritize and categorize your goals into three major buckets.
The Three Buckets
Short term goals
Mid-term goals
Long term goals
Each bucket of goals requires a different investment plan that matches what you are trying to accomplish. For example, we may recommend you keep your short term goal money invested more conservatively than your long term goals. We also will recommend different types of tax advantaged accounts based on when you expect you’ll need the money from your plan.
The Income Problem
The key issue retirement planning addresses is the potential shortfall of income you’ll experience after leaving your job or selling your business. Here’s a basic example below:
While working your salary is $150,000
Your take home pay is around $8,000/month
When retired, your income may be limited to Social Security and/or pensions
Assuming Social Security is $2,500/month after tax, this individual will need $5,500/month after tax, plus healthcare ($1,000/month).
$6,500/month x 12 months = $78,000 after tax income need
Assume 15% tax rate = ~$92,000/year generated from investment accounts
Withdrawal rates in retirement
Your probability of success in retirement is a simple math equation:
Withdrawal rate + inflation rate = net portfolio return
Assuming inflation is 3%, your retirement equation looks like this:
Withdrawal rate + 3% inflation = 7% net return
Basic math would tell us that in this example, the max withdrawal rate would be 4% in year one of retirement. A 4% withdrawal rate with a $92,000 income need would require $2.3 million ($92,000/.04).
If return assumptions are 8% however, the portfolio would only need to be $1.84 million.
Every situation is unique so it is important to consult with a fiduciary financial advisor who can build a customized financial plan and investment plan for your specific circumstances. But in general, the math of the portfolio is critical to your long term success. If you miscalculate part of the retirement planning equation, your money may not last over the course of a 20-30 year retirement horizon. If done correctly, your financial plan should allow you to end your plan with roughly the same amount of money you started with.
Financial Advisor in Chicago, IL
Stenger Family Office - Chicago Financial Advisors
150 N. Riverside Plaza
Suite 1950
Chicago, IL 60606
(630) 912-8295