What Will $1 Million Get You in Retirement?

One Million DollarsBy Douglas Carey

I spend a lot of time helping people understand how much money they will need to meet their retirement goals. Today I want to look at that subject from another angle: What will $1 million actually get you in retirement?

This is an interesting question for two reasons: First, because many people believe that $1 million is a comfortable amount to meet their retirement goals; and seconds, because we can look at the different ways in which a couple can use this $1 million without running out of money.

Like any retirement calculation, this one involves many assumptions. But as long as our assumptions are reasonable -- say, 6% for annual equity returns rather than the 10% figure that many people used to use -- we can come up with a reasonable estimate for how much money one needs to retire comfortably.

Let's start with the assumptions I used for the couple we will look at:

Before we attempt to generate a retirement plan for this couple, the first thing we need to clear up is: What constitutes success? We live in a dynamic world, especially when it comes to investing. So I like to look at the probability of never running out of money in retirement using a system called Monte Carlo analysis, in which thousands of scenarios are run to determine the odds of various outcomes. In this case, returns on investment are treated as widely variable (because, as we all know, they are), with the possibility of shocking investment returns in every scenario in every year.

In this example, I'll define a plan as a success if it returns a probability of 80% or better that funds never run out in retirement.

Under the retirement plan above, I calculated the probability that the couple would never run out of money at 95%. This easily meets our definition of success. In fact, this couple could spend more than $50,000 a year and still succeed: If they spent $55,000 annually, they'd still have an 80% chance of never running out of money.

That leads naturally to another question: What could we do to change the plan so that the couple could spend that $55,000 a year, and still increase their odds of never running out of money?

There are really only two ways to do this since this couple is already retired (assuming they don't want to go back to work): They can find higher returning investments with the same level of volatility they currently have, or they can find investments that have the same returns, but less volatility.

My favorite way to reduce volatility while maintaining reasonable levels of return is to buy high-quality dividend-paying stocks that have a history of rising dividends over time. A few of my favorite dividend payers for retirement portfolios that have consistently raised their dividends over the years are Johnson & Johnson (JNJ), Sysco (SYY), AT&T (T), Walmart (WMT), Coca-Cola (KO), and Eli Lilly (LLY).

In the scenario above, I replaced their Equity Value fund with the stocks listed above, equally weighted. I kept the same total return assumption, but lowered the level of volatility to the historical levels of these stocks. That is, I reduced the volatility level from about 16% to 13% per year.

The result: The probability of the couple never running out of money jumps from 80% to 88% -- solely due to the fact that they are now invested in more stable, solid dividend-paying stocks instead of an equity index fund.

Each person and every couple has a different situation, and might need to change a variety of things in their financial plan in order to meet their retirement goals. But it is usually impossible to tell whether or not you can retire when you want until you sit down and actually run through the numbers. At that point, you can begin running interesting scenarios that will tell you what you need to do to get to your goals.

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Basically, what you are saying is that if my wife and I take a late retirement and die early, we might make it.

December 23 2013 at 12:55 PM Report abuse rate up rate down Reply

Anyone that retires should have had their primary residence paid off. You should also have all your credit cards and auto loans paid off. If you don't have a lot of expenses, and you have learned to live within your means anyone should be able to live on $50,000 a year. I know many folks who live on much less and they don't have a cool million saved up.

As far as investing is concerned, there are numerous stocks that pay 7 to 8% and increase their dividend payments every year. It takes researach to find them and your local stock broker will not do the work for you because they make their money by churning your account and don't want customers who buy and hold dividend paying stocks.

Don't rely on a financial advisor. Learn to do your own investing and you will do better than 95% of mutual funds and almost all stock brokers.

December 22 2013 at 11:26 PM Report abuse rate up rate down Reply

You mean you don't have like a million or two just hanging around?

December 22 2013 at 10:31 PM Report abuse rate up rate down Reply


December 22 2013 at 9:33 PM Report abuse +3 rate up rate down Reply

Whoever approved this article obviously does not have a firm grip on the reality of the present economy. Many people save their whole lives and still don't come close to one million dollars. You are obviously living in a fantasy world when it comes to the majority of the citizens of this nation. This article should have never been posted. It is unreachable for most.

December 22 2013 at 9:07 PM Report abuse +2 rate up rate down Reply

What about people who are lucky enough to save one fourth of that amount. Any advice for us? Or would that advice be that we have to keep working until we are 95 and then drop dead?

December 22 2013 at 8:31 PM Report abuse +2 rate up rate down Reply
Tom Pina

You didn't say if they Owned there home , aside they still have property taxes,health insurance, car insurance that will never end . Then did they pay off any loans before retirement .As for dividends there just above the going bank
Rates for certificate of deposits , 2 or 3 percent if you have the right stocks. You also have to have that deductible
That your medical insurance requires , if your a lucky couple neither of you get sick or acquire a chronic illness.
You might be able to live off your retirement income. Do they have children ,going to college ,getting married,or wanting to start a business.How informed are they about there investments ? Are they pro active in there personal
Financial affaires?
We were in a situation with great income ,large investments ,every base covered ,pro active . But things do happen
And your on God time , don't rely on your investment adviser ,he makes a living of your money. He doesn't lose ,
You do, he just gets another client . It's up to both of you to lean about how to survive ,you made this money .

December 22 2013 at 8:15 PM Report abuse +2 rate up rate down Reply

I have enough money to last the rest of my life........as long as I die by next tuesday.

December 22 2013 at 7:45 PM Report abuse +6 rate up rate down Reply

Truth is the income on $1M is more like $15K a year. Even at $50K a year you are in for a shock. Last 10 years food and transportation has risen 3 fold. The next 10 years the dollar won't be worth spit.

December 22 2013 at 7:41 PM Report abuse +3 rate up rate down Reply
3 replies to Rod's comment

This is a bunch of BS! How many Americans can save a million dollars for retirement?????? Get real!

December 22 2013 at 7:32 PM Report abuse +8 rate up rate down Reply