June 25, 2013 -- (Note: this article was originally posted in our Blog, but we have reposted it here in Tips & Picks for those who might have had trouble accessing it there. The Blog version has many interesting comments that you might want to read).
If someone had asked us in 1970 if we would feel comfortable about retiring some day with savings of $1 million - we would have said - YES! But even for the 1 in 12 American families who have that much saved outside of their home equity, a million smackeroos is really not so much to live on in retirement anymore.
According the BLS.gov CPI calculator, $1 million in 1970 is the equivalent of $6,003,737 in 2013. That change explains the inflation side of the problem pretty well. But there are other reasons why the million dollar figure isn’t that great:
- The pathetic amount you can earn on that much money (10 year Treasuries are currently returning 2.2% - 2.2% of $1 million is $22,000 a year, while a 1 year CD @.24% pays a whopping $2,400 -a year!)
- It has taken stocks 5 years to return to their pre-crash levels (and for those who sold at the bottom, the money is gone)
- Increasing life expectancies - your money has to last a lot longer than it use to.
In “For Would Be Retirees, A Million-Dollar Illusion”, the New York Times recently reported on a hypothetical 65 year old couple with $1 million in retirement savings, all invested in tax-free municipal bonds. According to the analysis in the article, in the current low interest rate world if they take out 4% each year they have a 72% chance of running out of money before they die. That risk declines to about 35% if they take out 3% annually. It’s worth noting, however, that if interest rates return to more normal levels the chances of outliving your savings with a bond-based portfolio get much smaller.
Conventional wisdom on its head
The traditional advice has been that the older you get, the more you should have invested in bonds and the less in stocks. However, according to the referenced study by AllianceBernstein, in this low-interest world adding more stocks to your portfolio greatly lessens the chance you will run out of money. There is still plenty of risk when you invest in stocks, though, particularly if you need to take out money in those periods when the market is down.
All of this highlights the dependence even millionaires now have on Social Security, which is inflation protected.
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