OK, so a million dollars isn’t what it’s used for.
That is the worry of many American millionaires. So at least, as reported by money management giant Natixis, which owns bond store Loomis Sayles, among others. Natixis polled about 1,600 people with at least $1 million in “investable assets.”
And just over a third, or 35%, said they think “it will take a miracle to achieve a secure retirement,” reporting company.
A miracle, nothing more, nothing less. And this in a secular age.
The average person in the survey has $2 million in investable assets.
It may not be particularly surprising. Everyone suffers a flood of doom, gloom, and financial failure, all of which make things seem difficult and much worse than they really are.
Meanwhile, there is a widespread lack of understanding of how much we really need to retire.
It doesn’t help that the money management industry relies on rules of thumb which, in terms of balance, do not help. Like the “replacement rate,” argues that in order to have a comfortable retirement, you will need to replace a certain percentage of your pre-retirement income. The commonly used figure is 85%.
The logical outcome of that notion is that if you get a raise while working, it will be harder for your retirement, not easier, because now you will “need” to generate 85% of the high income. than.
What does that mean for you?
Of course, there are some people who are really in danger, even if it’s $1 million or $2 million or more. That includes, for example, many people with chronic and serious illnesses that health insurance ignores.
But for others? Let’s run the numbers.
The annuity rate increased this year. Road, way up. You can thank the Federal Reserve, the inflation crisis, and the bond market crash. Those people conspired to send corporate bond yields skyrocketing. Since insurers have to use those bonds to fund lifetime annuities, that means an annuity payout ratio goes up.
A year ago, a 65-year-old man with $100,000 converted that amount into a lifetime annual benefit that would be locked in for no more than $6,000 a year in income. Today, the same amount would buy him a 30% higher income, or $7,900.
So those with $1 million to invest can guarantee themselves an annual income of around $79,000 a year. (For women, this would be $76,000, as women tend to live longer.)
Then there’s Social Security, which for the top earners adds up to an extra $40,000 a year assuming you delay getting it until you’re 67. If you delay getting it until you turn 70, when the age credits have expired, you will receive $50,000 a year.
If you have $1 million worth of investment assets, you may have paid off your mortgage in retirement – this is usually a good idea. In that case, you’re living near rent-free at $120,000 a year (you’ll still have to pay for things like maintenance, condo fees, taxes, of course).
If you haven’t paid off your mortgage, you may have taken advantage of the economic crisis caused by the COVID shutdowns two years ago and refinanced it at 2.5% a year. So you’re paying a little more for the cost of living, but hardly as much as the Earth.
Oh, and if you have $2 million in investable assets, you’re living rent-free, or cheap, on about $200,000 a year.
Not everyone wants to put all of their savings into one lifetime annual benefit when they retire – especially because inflation riskcurrently running at 8% a year.
The usual strategy for them is the so-called 4% rule, which means you invest your money in a conservative portfolio, withdraw 4% the first year and then increase your withdrawal amount. you each year in line with inflation.
For someone with $1 million, that gives them a portfolio income of $40,000 for the first year, growing after that. So they are getting less than when they received an annuity, but they have inflation protection in the long run.
The very good news for those looking to pursue this strategy is that this year’s financial crisis has presented us with more opportunities for retirement portfolios than we did a year ago. Blue-chip stocks and bonds both fell. (The risk-free, inflation-protected Treasury bond will pay inflation plus 1.2% a year. A year ago, this bond paid below inflation.)
If anyone is still struggling with a secure retirement with these numbers, they still have access to three magic techniques for getting a better retirement out of your money: working longer, move to a cheaper place, and spend less money.
Call it a Christmas miracle.