A few weeks ago, I was invited to join a panel on this topic – Can you retire with a million dollars? I was on vacation at the time so I couldn’t attend, but my answer is a big YES. Of course you will have a perfectly fine retirement with a million dollars.
In March 2013, the Spectrem Group found that about 9 million U.S. households have a net worth of at least $1 million. That’s 9 million households out of 114,800,000 households. So we have over 100 million households that aren’t millionaires. There are millions of retirees who aren’t even close to being a millionaire. How do these people live?
Your retirement number
Most financial advisors will tell you that you need to replace 80% of your income before you retire. If your household makes $50,000/year, then you need to be able to generate $40,000/year before you dare retire. This means you need about $1,000,000 in investment so you can withdraw 4% ($40,000) every year. Frankly, this is a little ridiculous. How many households with $50,000/year income can save up a million dollars? You can use the Financial Mentor’s calculator at the end of the post to see how long it will take you to become a millionaire.
How do non millionaires retire?
How does a regular family retire? Most of us can’t keep working in our careers forever. We get older and at some point we have to move on. Retirees make do when they don’t have a million dollars in their investment accounts. Heck, my parents and in-laws are retired and they certainly are not millionaires. They are doing just fine, though. What are their secrets?
Secrets to retiring without being a millionaire
- Payoff all your debt before retirement. A lot of people are carrying debt into retirement these days, and that’s a bad idea. If you don’t have any debt, your cost of living can be very affordable.
- Social security benefit. If you are near retirement now, you should get your full social security benefit. If you’re in your 20s or 30s, then it’s more questionable. Personally, I think we’ll get something even if it’s not as much as estimated.
- Work in a job with pension. These jobs are getting rarer these days, but they are still out there. Firefighters, teachers, and other public servants don’t need as much saved up because they have a pension to help pay the bills.
- Make some money post retirement. Retiring doesn’t mean you have to stop making money. I think everyone should explore alternative ways to bring in extra income. Retirees can create a business, consult, coach, blog, sell crafts, and many other things. Having an active retirement is much more fulfilling than playing golf all day anyway.
- Refill your piggy bank as needed. This one is from our reader davidmichael. He and his wife rejoin the labor force whenever they need to refill their cash account. They travel and have fun the rest of the time until they run low on money again. Working a few months out of the year sounds fine to me.
- Sign up with Medicare/Medicaid if you qualify. Health care can be very expensive as you get older. If you qualify for any assistance, then you should sign up for it. There are many local programs that assist seniors as well so don’t ignore them.
- Relocate to a lower cost of living area. This one is harder for most Americans, but moving to a foreign country is a great way to reduce your expense. You can live a very comfortable lifestyle in South America or Southeast Asia for a fraction of cost in the US. Why not branch out a little and see the world?
- Move in with your family. Another difficult choice for Americans, but more and more people are living in a multi generation households. Doing so saves a lot of money and can bring the family closer together.
Many of our readers are young and they have large retirement target like 5 million dollars. I wish them good luck, but it’s also possible to retire with less than a million. I’m an advocate of living a frugal lifestyle and enjoying life more. That means early retirement so you can spend more time doing what you want.
*Note* I think a million dollars is plenty if you’re in your 50s or 60s. However if you are younger, you probably need a bit more. Inflation will keep reducing the value of a million dollars and in 20 years, it will be worth nearly half that.
Do you think you need a million dollars or more to retire?
If you need help keeping track of your finances, try using Personal Capital to manage your budget and net worth. It can help you keep track of your income, expenses, and net worth, all in one place. Personal Capital is geared for investors and has many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees.
photo credit: flickr by zsoolt