$1 million just isn’t what it used to be. With rising inflation and devaluation of the dollar, what’s a retiree to do? Why not simply make 2! I’ve heard, through brief conversations with several soon to be retirees, that their goal is $2 million since $1 million just simply isn’t enough. The conversation goes something like this:
“$1 million isn’t enough to retire, so I think I need $2 million!”
Yup, that’s about as deep as it goes. No reasoning, no questioning, just doubling of the retirement amount, and everything will be A OK. But… is $2 million enough to retire?
Let’s pretend for a moment that we actually reach the $2 million dollar mark. First of all, congratulations, but is it enough for you to retire on? Well there are a couple variables that change this scenario up quite a bit depending on your situation in life, which are:
-When you pass away
-The rate of return you can earn on your money
-How much you plan on withdrawing yearly
Running these numbers and estimating how much you need is a bit like life insurance in that you’re taking a gamble whether you’ll live or die. A bit morbid, but true nonetheless.
The average American lives a little less than 80 years, so we’ll use that as our croak date. Next we need to determine how much interest your $2 million is making. Right now long term bonds are making roughly 5%. The historical inflation average is also about 3%.
-Age of death: 80
-Rate of return: 5%
-Amount left at death: 0
We can then calculate each age to determine how much you can withdraw each year:
If you’re 65: $155,650
If you’re 55: $102,440
If you’re 45: $80,004
If you’re 35: $67,819
These results, of course, are assuming you have zero left once you reach 80 and have made 2% on your money each year.
If you’d like to not touch your nest egg and live only on the interest consider the amounts below. We’ll assume these amounts are after inflation. Thus, the rate on your return would be the rate listed below, plus 3%.
Percent Allowed Take Out
If you’d like to calculate different scenarios than described above simply use the widget below.
- N = number of years for the investment (in this case years before death)
- I = Interest rate – Whatever you expect to earn, minus 3% for inflation.
- PV = Present value – Your current amount, in this case $2,000,000
- PMT = The amount you’ll receive each year based on the other numbers, leave this blank and press the computer button under it when you fill in the other slots.
- FV = Future value – In our example it was 0, this is simply the amount left when you pass away.
So is $2 million enough to retire? I think so, but my expenses are very low. Consider the lifestyle you’d like to lead, then run the numbers above to consider if you’ll have enough to pay for them until you’ve gone to a place where money doesn’t matter!
Please remember, these are simply scenarios and estimates. Seek professional help with your retirement planning before making any major decisions.
Another article related to this can be found at: CNN Money