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A recent CNBC article indicated that 58% of those who responded to a 2019 TD Ameritrade survey felt that a $1 million retirement nest egg would be sufficient to fund a comfortable retirement. This may or may not be the case depending upon your individual situation. To me it seems more meaningful to look at the level of income you’d like to generate in retirement and then determine if a given lump-sum, combined with other sources of retirement income, will support that income stream. Let’s take a look at what it takes to provide $100,000 income annually during retirement.

The 4% rule

The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years. This very useful rule of thumb was developed by fee-only financial planning superstar Bill Bengen.

Like any rule of thumb it is just that, an estimating tool. At your own peril do not depend on this rule, do a real financial plan for your retirement.

Using the 4% rule as a quick “back of the napkin” estimating tool let’s see how someone with a $1 million combined in their 401(k)s and some IRAs can hit $100,000 (gross before any taxes are paid). Note this is not to say that everyone needs to spend $100,000 or any particular amount during their retirement, but rather this example is simply meant to illustrate the math involved.

Doing the math

The $1 million in the 401(k)s and IRAs will yield $40,000 per year using the 4% rule. This leaves a shortfall of $60,000 per year.

A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year.

The shortfall is now down to $20,000

Source of funds Annual income Retirement account withdrawals $40,000 Social Security $40,000 Need $100,000 Shortfall $20,000

Closing the income gap

In our hypothetical situation the couple has a $20,000 per year gap between what their retirement accounts and Social Security can be expected to provide. Here are some ways this gap can be closed:

If they have significant assets outside of their retirement accounts, these funds can be tapped. Perhaps they have one or more pensions in which they have a vested benefit. They may have stock options or restricted stock units that can be converted to cash from their employers. This might be a good time to look at downsizing their home and applying any excess cash from the transaction to their retirement. If they were business owners, they might realize some value from the sale of the business as they retire. If realistic perhaps retirement can be delayed for several years. This allows the couple to not only accumulate a bit more for retirement but it also delays the need to tap into their retirement accounts and builds up their Social Security benefit a bit longer. It might be feasible to work full or part-time during the early years of retirement. Depending upon one’s expertise there may be consulting opportunities related to your former employment field or perhaps you can start a business based upon an interest or a hobby.



Things to beware of in trying to boost your nest egg

Avoid high cost financial products that often do more to boost the bottom line of the financial sales person than that of their clients.

Likewise, don’t give into the fear mongers peddling financial products like Indexed Annuities or similar products “that can’t lose.”

Don’t be too cautious with your investments in retirement, inflation is a retiree’s worst enemy.

On the flip side don’t take on excessive investment risk in an effort to catch up if you feel that you are behind where you need to be.

The scenario outlined above is hypothetical but very common. As far as retirement goes I think financial journalist and author Jon Chevreau has the right idea: Forget Retirement Seek Financial Independence.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

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