OK, so a million dollars isn’t what it used to be.
That’s the worry of a surprising number of American millionaires. At least that’s what fund management giant Natixis, which owns bond boutique Loomis Sayles, among other companies, reports. Natixis surveyed around 1,600 people with at least $1 million in “investable 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, nothing less. And this in a secular era.
The average person in the survey had $2 million in investable assets.
This is perhaps not particularly surprising. Everyone is subjected to a torrent of unhappiness, gloom and financial defeatism, which makes things much harder and worse than they really are.
Meanwhile, there is widespread ignorance of how much we really need to retire.
It doesn’t help that the money management industry relies on rules of thumb that, on the whole, make very little sense. Like “replacement rates,” which argue that for a comfortable retirement you will need to replace a certain percentage of your pre-retirement income. The usual figure used is 85%.
The logical result of this concept is that if you get a raise at work, funding your retirement becomes more difficult, not easier, as you will now have to generate 85% of a higher level of income.
Does this make sense to you?
Naturally, there are people who are really in danger, even with 1 million or 2 million dollars or more. This includes, for example, many people with serious and chronic illnesses that are neglected by medical insurance.
But for everyone else? Let’s run the numbers.
Annuity rates are up this year. Very, very high. You can thank the Federal Reserve, the inflation crisis and the bond market crash. These have conspired to drive up interest rates on corporate bonds. As insurance companies have to use these bonds to fund life annuities, this means that annuity payout rates are rising.
A year ago, a 65-year-old man with $100,000 who converted that money into a life annuity would have locked in an income of no more than $6,000 a year. Today, the same amount will provide him with 30% more income, or $7,900.
Thus, those who have $1 million to invest can guarantee themselves an annual income of around $79,000 per year. (For a woman, the figure would be $76,000, as women tend to live longer.)
Then there’s Social Security, which for higher income would max out at an additional $40,000 a year assuming you delay taking until you’re 67. If you delay taking until you are 70, when the age reaches its maximum, you get $50,000 a year.
If you have $1 million in investable assets, you’ve probably paid off your mortgage when you retire, which is usually a good idea. In this case, you’re living nearly rent-free on $120,000 a year (naturally, you’ll 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% per year. So you pay a little more for the cost of living, but barely the Earth.
Oh, and if you have $2 million in investable assets, you’re living rent-free, or low cost, on about $200,000 a year.
Not everyone wants to put all of their savings into a life annuity when they retire, not least because of the threat of inflation, which currently stands at 8% per year.
The usual strategy for them is the so-called 4% rule, which means that you invest your money in a conservative portfolio, withdraw 4% of it in the first year, then increase your withdrawal each year in line with inflation.
Lily: Do you think you can count on the 4% rule in retirement? Think again.
For someone with $1 million, that gives them a portfolio income of $40,000 in the first year, which increases thereafter. They therefore receive much less than with an annuity, but they benefit from long-term inflation protection.
The really good news for those who want to pursue this strategy is that the financial turmoil this year has given us many more opportunities for retirement portfolios than a year ago. Stocks and blue-chip bonds are all down. (Inflation-protected, risk-free treasuries will pay inflation plus 1.2% per year. A year ago, they paid less than inflation.)
If anyone is still struggling to have a secure retirement with these numbers, they still have access to the three miracle techniques for getting a better retirement with their money: working longer, moving somewhere less expensive, and spending less money. .
Call it a Christmas miracle.
#retire #million #todays #millionaires