How much is enough? When can your clients retire?
Millions of baby boomers, and even members of later generations who have visions of an early retirement, are all asking these same questions.
The longing for an answer, a definitive finish line, has prompted many large financial institutions to market a "number." Reach this number and you'll be set. Anyone wise and patient enough to run a stochastic analysis will quickly realize there is no perfect "number". A financially successful retirement depends upon hundreds of variables, some within our clients' control and others beyond their management. Nevertheless, a frame of reference can at least offer a starting point.
Here are four major topics I encourage clients to consider.
1. Spenddown
Here's the easiest solution to offer consumers who ask, "How long will $1 million last in retirement?"
Help them take their nest egg and divide it by the retirement time horizon. In other words, $1 million over a 20-year retirement will offer $50,000 of annual income, assuming a linear paydown with no other influencing factors.
Your clients can probably assume that they will invest the funds, not just store cash under the mattress.
This leads to another common solution: using only the interest distributions, to preserve principle.
Assuming Mr. and Mrs. Retiree receive a net return of 4% every year in retirement and peel this off as income, they get $40,000 of annual income.
But why not combine some interest with the original linear paydown strategy? If Mr. and Mrs. Retiree were to do so, they'd now enjoy $70,752 annually. They could die right on time, after year 20, with zero dollars remaining.
2. Inflation
The number "1 million" has long held an aura about it.
To some of your clients, $1 million may still sound like a sexy fortune that can cure all worries.
Others may recognize that $1 million just isn't what it used to be.
This awareness can help you start the conversation about a major wealth-eroding factor: inflation.
In 1913, when the federal income tax was permanently enacted, $1 million would be equivalent to $25.8 million in 2019 dollars.
In 1945, when World War II ended, the spending power of $1 million amounted to $14.2 million in 2019 dollars.
