OK, so a million dollars isn’t what it used to be.
But is it really not enough to give you a secure retirement?
That’s the worry among a surprising number of America’s millionaires. So, at least, reports money-management giant Natixis, which owns bond shop Loomis Sayles, among other firms. Natixis polled around 1,600 people with at least $1 million in “investible assets.”
And just over a third, or 35%, said they thought “it will take a miracle to achieve a secure retirement,” the firm reports.
A miracle, no less. And this in a secular age.
The average person in the survey had $2 million in investible assets.
It may not be especially surprising. Everyone is subjected to a torrent of doom, gloom and financial defeatism, all of which makes things seem much harder and worse than they actually are.
Meanwhile, there is widespread ignorance about how much we really need to retire.
It doesn’t help that the money-management industry relies on rules of thumb that, on balance, make very little sense. Like “replacement rates,” which argue that for a comfortable retirement you will need to replace a certain percentage of your preretirement income. The usual figure used is 85%.
The logical result of that concept is that if you get a raise at work funding your retirement gets harder, not easier, because now you will “need” to generate 85% of a higher level of income.
Does that make sense to you?
Naturally there are some people who are genuinely in peril, even with $1 million or $2 million or more. That includes, for example, many who have serious and chronic medical conditions that are neglected by medical insurance.
But for everyone else? Let’s run the numbers.
Annuity rates are up this year. Way, way up. You can thank the Federal Reserve, the inflation crisis, and the collapse in the bond market. Those have conspired to send interest rates soaring on corporate bonds. As insurance companies have to use those bonds to finance lifetime annuities, that means annuity payout rates are up.
A year ago, a man of 65 with $100,000 who converted that money into a lifetime annuity would have locked in an income no higher than $6,000 a year. Today the same amount will buy him an income 30% higher, or $7,900.
So those with $1 million to invest can guarantee themselves an annual income of around $79,000 a year. (For a woman the figure would be $76,000, because women tend to live longer.)
Then there’s Social Security, which for a top earner would max out at another $40,000 a year assuming you delayed taking it till you’re 67. If you delay taking it until you are 70, when the age credits max out, you’re getting $50,000 a year.
If you’ve got $1 million in investible assets you have probably paid off your mortgage by the time you retire — which is generally a good idea. In that case you’re living almost rent-free on $120,000 a year (naturally you will still have things like maintenance, condo fees, taxes and so on to pay).
If you haven’t paid off your mortgage, you probably took advantage of the economic crisis caused by the COVID lockdowns two years ago and refinanced at 2.5% a year. So you’re paying a bit more for living costs, but hardly the Earth.
Oh, and if you’ve got $2 million in investible assets you’re living rent-free, or rent-cheap, on around $200,000 a year.
Not everybody wants to put all their savings in a lifetime annuity when they retire — not least because of the threat of inflation, currently running at 8% a year.
The usual strategy for them is the so-called 4% rule, meaning you invest your money in a conservative portfolio, withdraw 4% of it the first year and then raise your withdrawal each year in line with inflation.
For someone with $1 million, that gives them portfolio income of $40,000 in the first year, rising afterward. So they’re getting way less than they would with an annuity, but they have inflation protection over the long term.
The very good news for those who want to pursue this strategy is that the financial turmoil of this year has given us many more opportunities for retirement portfolios than existed a year ago. Blue-chip stocks and bonds are all down. (Inflation-protected Treasury bonds, with zero risk, will pay inflation plus 1.2% a year. A year ago they were paying less than inflation.)
If anyone is still struggling with a secure retirement with these numbers, they still have access to the three miracle techniques for getting a better retirement out of your money: working longer, moving somewhere cheaper and spending less money.
Call it a Christmas miracle.