Is it still possible to retire on 1 million dollars? You ask a millionaire and they will tell you that a million dollars isn’t that much money anymore. Decades ago retirement would come primarily from pensions. However, recently with the emphasis on 401ks and IRAs there is always talk of saving up for $1,000,000, but given inflation over the years that a million dollars is becoming less and less the norm. But with talk of 2 or 5 million dollars what is the right amount to retire? We will go over 3 possible options to stretch out that million dollars.
Is There a Chance? – Sure it’s Possible
Before we dive into different investment vehicles and returns on investments based on various risk levels let’s first see if it’s even possible. Let’s make a few assumptions. Let’s assume that you don’t touch the principal amount of the investment, either you use it to invest, and plan on living off the dividends, or consider it a lump sum payment in exchange to receive passive income such as an annuity.
Now the current median income for the United States is $60,000. That is a decent number, and eventually, you may lower it since some expenses (such as a mortgage payment) would no longer apply, but you would see an increase in other areas such as healthcare. Typically, most financial planners would say if you want to maintain the same style of living to count on 80% of your non-retirement income, which would get us $48,000. But since most retired people have more expensive hobbies (mainly travel) for now we keep the original $60,000.
How Much to Withdraw – 2 or 4% rule?
The 4% rule is an old-time metric from the 90s as a rule of thumb that if you keep your investments in a 60/40 stock and bond split that you could withdraw up to 4% of your investment. As your investment would continue to grow, pulling out 4% won’t eat away at your nest egg very quickly. Doing this technique would still provide you enough money to last you 30 years into retirement. For those retiring around 65 that would last till your mid-90s.
For a million dollars that would let you withdraw $40,000 a year. That’s not enough to cover out $60,000 amount, but they assume that you will off-set the rest with Social Security or other investments.
Another rule would be to use 2% of your investment. This would let you pull out $20,000 but also let you accelerate it, later on, in life where you pull more than 4% later on, possibly even 8% some years since you’re letting your investment grow more those early years.
The Return – Beat Out Inflation
The reason every mention to have this million-dollar nest egg in an investment vehicle is to beat out inflation. Holding onto money stagnant (under a mattress or low savings account) will end up costing you in the long-run. With inflation rates typically rising 2-3% each year, you need to be earning 3% just to actually be keeping up with the relative costs of good around you. And in the current state of low rates on savings accounts, it would be hard to find an account to beat 3%, even some of the highest yielding accounts only pay 2.5%.
So we are looking for higher return and the majority of the people with a 401k and IRA will have their money in the stock market and primarily mutual funds.
Where is the Money – Retirement Accounts or Other Assets
A big assumption here is that you have the majority of your nest egg in a retirement account which follows additional tax rules and withdrawal limitations. These retirement accounts have their own rule of benefits, one primarily being a tax deferral on earnings. The longer you keep your money in the account the more it will grow, and you won’t be paying taxes on it until you withdraw. Now if you had that retirement account in a Roth IRA you won’t be paying taxes coming out and you have more flexibility on your how much you are required to withdraw.
Most likely you have a chunk of money in these retirement accounts. But If you maxed out a retirement account for 40 years, inputting the max $5000 a year will only account for $200,000, it is a 401k you will have a higher max currently at $19,000 a year. But how many people actually max out their IRA or 401k plans are not the majority. In fact, the percentage is between 8-14% depending on the brokerage reports.
The median balance, middle of the pack ranked from lowest to highest, of a 60-year-old employee is $65,000, and the average balance of all those accounts is just shy of $200,000. This is not helpful in our ideal nest egg of $1,000,000.
If you have your money outside of a retirement account or business then you’re going to be faced with a more complete taxing each year on your money.
4 Options for Your Money
Now that you have some guidelines on the many scenarios to build that nest egg and where the funds will be maintained, we need to provide a few options.
Option 1 – Retirement Plan – EFT & Index Funds
Option one is to update the majority of your retirement nest egg into conservative income and value funds which on average will return 6-8%. These funds are quite liquid in terms of getting money out, except for IRAs and 401Ks which have their own rules you’ll want to follow.
As determined before, 6% of 1 million will give us the $60,000 you are seeking. You would want to diversify across multiple funds, moving funds from more aggressive growth funds into more stable income-producing funds. Then as time moves on and you need to withdraw more consistently the investments should turn more conservatively as you shift them into income and value funds.
You may never get the point where you need to completely move your money away from growth and into income investments but the strategy is there to help stretch our your dollar. Find a few conservative funds and hopefully ride the wave, but if the market takes a downturn you may be caught in a pinch for a few years until you can wait it out and let the market recover again.
Option 2 – Real Estate & REIT
Option 2 is assigning your money to work for you in Real Estate. If you still have funds tied up in a retirement IRA account you can consider a self-directed IRA which will allow you to use your retirement account funds to directly purchase real estate. Or if you have money from the sale of a home (as you downsize) or from any other investments you can directly purchase real estate.
There are many ways to invest in Real Estate for little money. And you can diversify easily across the board so let’s examine some options.
You could work with a turnkey company to purchase homes outright (or with a mortgage either before or after the purchase). By staying with the 1% rule (want Gross rent to be at least 1% of the purchase price of the home), if you invested $1,000,000 in real estate you would want to expect $10,000 in rent per month. That would end up being $120,000 a year which is much higher than the $60,000 goal we have. But real estate comes with its own expenses.
Commonly it’s considered that 25-35% of the gross rent will go toward insurance, taxes, maintenance, and necessary property management. So based on those numbers the end result would be $120,000 * 65-75%, or $78,000-$90,000. Both of those numbers are higher than our $60,000 goal. In fact, you could have expenses go up to 50% of the rent to maintain our $60,000 goal.
Another possibility is to purchase nicer homes which usually have a slightly lower return but at 7% that would give us $7000 a month ($84,000 a year) and take into account expenses of about 28% and you still end up with $60,000. The major benefit is typically rent increases, and if the home value increases over time as well that appreciation should be considered an added bonus.
Most likely you will want to diversify the portfolio, and not just into multiple houses. Some options would be to invest in a peer level, use various REITs or Real Estate Investment Trust (Typically 10-14% returns) or become a hard money lender (10-20% returns). You could spread out your investment, possibly with a handful of rentals to provide the majority of the income you need to live off of while you shift the rest of your money to longer-term projects which can producer higher returns that can continue to grow until they are needed.
Option 3 – Business Ownership
If you’re not quite ready to settle down and retire you could invest in a business or start your own. Many small business owners now work much later than the typical retiree. They have always found joy in working in their business and feel that it’s become part of their everyday life and they choose to keep working.
With the million dollars that you have to work with you could apply for that money in many ways, though if you are just starting a business it will take time to produce results.
If you don’t currently have your own business, you could start freelancing (fiverr.com is a good resource), another option is to partner or buy out another business that you’re familiar with (there are many listings in your local classifieds, many require minimal knowledge of the current business), another option is to build or buy a website (income-producing websites take time to build, but there is a market to build up and sell to others with very little ongoing maintenance, and many sites sell for double their current annual profits).
Option 4 – Bonds & Dividend Life Insurance
Our last option is focused on very low-risk income-producing options. Bond & Life Insurance have been some of the oldest financial vehicles available and though they aren’t as glamorous as high performing stocks, they are known to be solid and steady.
Bonds can vary in the risk vs return that they provide, they tend to reflect and do better during times of high-interest rates, so if rates are low (as they currently are and have been for the past ten years) you’re going to see lower bond returns. Over the past few decades, we’ve seen times of high-interest rates move down to consistently low rates. We no longer see rates provide double-digit returns in the bond category, but we see stability and rates closer to 4-7%. Newcomers like Worthybonds, directly sell their bonds to investors and provide a stable 5% return with interest payable weekly. Though 5% is a good rate to start with, it will only provide for $50,000 given our million-dollar nest egg.
Life Insurance has been around for a long time, and though it’s no longer considered a primary investment or income vehicle, insurance companies are modifying and coming up with new ideas with more incoming producing retirement plans.
The two primary income-producing insurance types are a whole policy or an indexed universal life policy. Although explaining each one could be an article in and of itself, simply put the whole policy acts more like a bond and produces a steady rate of return typically between 5-8%. The indexed universal life can be considered investing in a capped stock market but without the option of losing any money.
Typically, if the market does really well then the policy will limit your one-year returns to around 12-15% or more if you choose to let to be indexed over a longer period of time. As the market goes down then instead of losing any money the index level will drop down to the new low. This helps you not lose any money but when the market returns you’ll be limited to that capped return.
After you checked a few ideas of how to retire with $1,000,000 do you now see that it’s possible? Typically, the hardest part is actually building up to the million-dollar limit. Instead, as you reach milestones of $50,000 or $200,000 you celebrate; but we must keep focusing on a higher-end result for the best chance to succeed.
There are a number of ways you can put your million dollars to produce enough income to let you retire with about $60,000 a year. Some options provide immediate returns, while others are built up over time. Diversification into a few categories and risk minimization are the primary goals when preparing for retirement. Consider your long-term goals and immediate income needs. You’ve earned this million dollars over your lifetime, just try to make it work for you now and provide you the cash flow that you need to live the rest of your life.