Do You Need $1 Million to Retire?

“I don’t believe people who say they don’t care about money and I don’t trust people who care too much.” – Doc Ford

According to the World Wealth Report, there are a total of 12 million individuals that are millionaires* around the globe. In the US, that number is roughly 3.7 million people.

People have a fascination with attaining millionaire status. For some reason that one number has always been one of the ultimate status figures for many people when they measure their finances.

Many focus on hitting the right number to reach to be able to retire. While I think it’s a worthwhile exercise to run the numbers to plan out how much you need to retire, focusing on just one number can be harmful to your end goals.

I think people need to think about accuracy (consider ranges of values) instead of precision (an exact value) because it’s impossible to predict what the future holds. It makes sense to come up with best and worst case scenarios based on your assumptions of market returns, the amount you save each year and your future earnings power.

Here’s John Bogle on this subject:

“There used to be a company that purported to tell you ‘the Number’ [how much you need to retire]. It’s more complex than that. It’s what those dollars are worth in 30, 40, 50 years. Everyone is looking for the Answer, and there really isn’t an answer except save. Save more. Invest for the long term, get cost out of the equation, and get diversified to the nth degree.”

DO I NEED $1 MILLION?
My answer on this question is that it’s very dependent on your situation. Obviously, since there are roughly 7 billion people in the world and there are only 12 million millionaires (about 0.17% of total population), there are many, many people retiring on less than $1 million.

Now that we’ve cleared up that myth, let’s look at some of the other factors you should consider when trying to determine if you need $1 million to retire.

1. Your Net Worth
Having $1 million in your investment portfolio does not necessarily mean you are wealthy if you carry substantial mortgage and credit card debt.

That’s why your net worth is such an important factor in your ability to retire. Having your mortgage paid off will give you tons of flexibility going into retirement. And you don’t want to be forced to leverage your living expenses through the use of credit card debt.

Paying off all of your debt before you retire gives you some wiggle room with your finances.

2. Other Sources of Income (Social Security, Pensions, etc.)
Most people don’t consider other forms of income when determining their net worth. The average present value of social security is around $300,000 per household (although this is based on a number of assumptions, so go to ssa.gov to see what your numbers are).

You can’t leave this money to your heirs, but it makes sense to figure out how valuable your alternative income sources are to be able to see the whole picture.

If you’re close to retirement age you should run some different options depending on when you take your benefits and incorporate this into your plan.

For those of us who are younger, it will be much harder to plan ahead because we don’t know how things will look with the social security program in the future (translation: save more, don’t plan on it, and it will act as a bonus for whatever you do get).

Those lucky enough to have a pension can calculate the present value of that asset as well. If you do have both, you have a huge fixed income allocation without having to invest in bonds.

3. Your Cost of Living
Where you live can have a large impact on how much money you will need to have saved by retirement. There is a substantial difference between living in a big city like New York or San Francisco, where the cost of living is high than a smaller city with a lower cost of living.

This could be a huge factor in determining whether or not you need $1 million to retire. If you live in a high cost of living city it could be helpful to move somewhere with lower costs to make your investment dollars stretch a bit further.

4. Your Spending Needs
This can also be thought of as your personal cost of living or even your personal level of inflation. You determine how much you spend, so this is an area where you have some control.

The rule of thumb from financial planners is that you will typically need to supplant around 75-80% of your current income in retirement. Again, having no debt can make a big difference in this calculation.

And if you have been diligent about saving over the years, going back to 75-80% of your income shouldn’t be a problem since the amount you have been saving is factored into that number. So if you were saving 15% of your pay, you have already been living on 85% of your income.

Having $1 million is better than not having $1 million (thanks, captain obvious), but you shouldn’t let a nice round number determine your retirement goals and options.

Your net worth, sources of income, cost of living and spending needs play a much larger role in shaping how you spend your investment portfolio. You have to consider all of these variables before making the determination if you need to hit a certain number.

Sources:
World Millionaire’s Wealth Totals $46.2 Trillion (RT)
Bogle’s Views on Retirement Income (Seeking Alpha)