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One of the reasons that $1 million isn’t what it used to be is the paltry rates offered on fixed income investments. With a million bucks, anybody looking for a secure retirement while maintaining their current lifestyle will be hard pressed to make that happen. With interest rates for the longer term CDs and treasuries hovering around three percent, retirees are looking at a mere $30,000 in addition to their Social Security. That might get you to really ask, "How much do I need to retire?"
Most financial gurus overstate the amount of money that you need for retirement because they fail to account for a very important component, the actual principal itself. If you plan to exit this world with next to nothing in your bank account, a million bucks can still go pretty far, especially if you’ve already gotten rid of all your other debts.
Determine Needed Income
The toughest thing to decide is how much you really want to have to live a certain lifestyle in retirement. If you’ve been living cheap, you’ll need less than the average retiree. Unlike the conspicuous consumption crowd, when you decide to throw in the towel, you won’t have to make brutal adjustments. You’ll already be well trained for the mission of making the most of a million and you will need less to retire.
Remember that your income in retirement goes further: no more Social Security and Medicare taxes and your status as a senior citizen comes with certain perks - like discounts on almost everything under the sun. Given your flexible schedule, you can snag cheap deals by taking advantage of off-peak rates for everything from airlines to movies to early bird specials.
Without making any major adjustments to your current lifestyle, you should easily be able to trim 15% off whatever you’re spending now. So if you are currently making $100,000, you’re probably paying an effective tax rate of around 25% and putting away $10,000 a year. That means you’re spending $65,000 in after-tax dollars to live the good life. And that’s the target figure you have to match. Remember, you’ll be through saving - so you can do without the $10,000 you used to put towards retirement. And it shouldn’t be too difficult to cut your current expenditures by ten to fifteen thousand dollars because everything - including property taxes - will probably cost you less. That gets you down to $55,000 - about half your gross. A good rule of thumb is to go by is 60% of your gross.
So, now you have to bridge the gap between your pension income and social security and that $55,000. So if you are going to get $25,000 in income from Social Security and a pension, that gap should be around $30,000. But you have to pay health insurance, so add in an extra $5,000. If you’ve calculated right, all what you’ll need to withdraw from your million dollar piggy bank is around $35,000 a year. What did we forget here - taxes. With all the tax breaks for the elderly, and the fact that you don’t have to pay social security - another $5,000 should cover your tax bill. Just bump up that final tally to around $40,000 and you should be good to go.
Now the big wildcard for most people is healthcare, which if you get into poor health and don't have coverage, can sap the biggest retirement funds out there. So plan on this early, work to get a subsidized plan, and do your trust planning in advance or risk getting hit with $25,000 bills.