Is $1 million really enough to retire? Even the wealthy say, ‘Do the math’
Inflation can no longer be ignored when it comes to retirement planning -- even high earners are putting off retirement because the traditional 4% plan to cover expenses no longer applies, says a new report.
Even high earners are putting off retirement because higher costs means they have to take more from their pot to cover expenses and will need to go beyond the traditional 4% plan.
In a new study that is likely to raise eyebrows among some American workers, an investment management company says that even millionaires worry about financial security in retirement, due to the turbulent economic times.
The report, entitled “The million-dollar question—how much do I need to retire?,” is based on a survey that included 1,617 individuals who have $1 million or more of investable assets. When looking at the answers on retirement security from those with $1 million or more in assets, they found that although 79% said they will be financially secure in retirement, when asked about specifics, those respondents were far less confident.
“The million-dollar mark may not be as significant as it once was,” the report said.
“It’s not that a million dollars isn’t a lot – it’s still the qualifier for most definitions of High-Net-Worth Individuals (HNWI) – it’s just that there are a lot more millionaires,” the report noted. “In fact, Capgemini’s World Wealth Report shows that the number of individuals at this asset level globally has nearly doubled from 10.9 million in 2010 to 20.8 million in 2020. That report finds large numbers of millionaires in North America (6.98 million), Asia (6.9 million) and Europe (5.36 million) alike.”
The rich are different—but they have similar concerns
The study concedes that wealthy individuals may seem insulated from financial insecurity, but that the reality is that many feel the same concerns about achieving a secure retirement as those with much less wealth. With so many headlines about inflation and a possible recession, the survey found that currently, many of the wealthy respondents felt they may have to put off retirement. “Even though they plan on retiring at the relatively early age of 63, almost six in 10 (58%) say they accept the fact that they may have to work longer than they plan,” the study found. Surprisingly, 36% of the high earners worry that they may not be able to retire at all, underscoring the idea that financial security may be in the eye of the beholder.
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The volatile markets of 2022 have been a concern for anyone with retirement investments—the report noted that the S&P 500 has been down as much as 23% in 2022. “Those opting to retire in 2022 will not only be taking income from a retirement pot that could be down 10%–20% or more, but higher costs will mean they have to take more from their pot to cover expenses and will need to go beyond the traditional 4% plan. With their savings depleted faster than anticipated, it will be hard for retirees to recover their assets, as they have less time and may have a lower risk tolerance,” the study said.
A plan for uncertain times
The report uses suggestions from the 2022 Natixis Global Survey of Financial Professionals to list several points that financial planners recommend. These include:
- Be mindful of the risks of inflation—although inflation remained low for many years, it can no longer be ignored. Planners say it should be figured into retirement strategies.
- Don’t underestimate your longevity—experts say investors commonly underestimate the years they have left.
- Set realistic income goals—investors also often overestimate how much income their assets will generate. “Setting a realistic income goal is another critical retirement planning step,” the report said.
The survey results underscore the need to have a well-thought-out strategy for the future, when it comes to retirement savings, the report concludes. Considering that experts often estimate about 4% of assets spent per year as a basic rule, investors may need to adjust their thinking. “A million may seem like a lot, but many people are surprised when they do the math and realize that 4% of $1 million is only $40,000 yearly,” says Dave Goodsell, Executive Director of the Natixis IM Center for Investor Insight. “This is usually quite a bit less than these individuals are likely used to living on annually. This underscores why it’s so important to work out all the assumptions and do the math early when making plans – and why professional advice is necessary.”