You may be surprised at how much you can spend
Traditionally, the financial services industry tells us that if we have saved $1 Million dollars for retirement, we won't outlive our savings. Watch this video with Emily Prendiville talking to a prospective client to find out how much you will actually have to SPEND per year of that $1 Million.
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Transcription of Is $1M enough video
Emily met with Pam to talk about whether her $1M retirement saving is enough. Check out this enlightening conversation.
Pam [00:00:00] So Emily it was a pleasure meeting you. Now I'm thinking about some of the words and stories that people have shared with me and what I've read on the Internet, a lot of it talks about save up $1 Million dollars and if you save a million dollars you are set for life. So I've been you know chopping away at that and putting away money and putting away money and just in our brief conversation, I got the feeling, is that enough? Is that is that going to work for me in my retirement, if I'm going to be retired for 25 years or something like that?
Emily [00:00:42] I love your question, Pam, and your thought process, even though we've already only spoken for a very short amount of time. I grew up with the financial field saying to me, as an adviser, “Well if you save a million dollars, you WILL be set.”
Emily [00:01:00] Yet, that's only half the story. Because when you get to retirement,
Emily [00:01:06] It's not the retirement plan that you need. And it's not the dollar amount you've accumulated. It's how much you get to spend.
Pam [00:01:16] Wow I never thought of it that way. You know I'm a visual person. Can you can you help me understand like what happens to that million dollars because I have always thought I would be able to spend the million dollars. I mean, are you saying that even if I put away a million dollars I'm not going to get to be able to spend the million dollars over that lifetime?
Emily [00:01:37] Well, you know it's interesting because the tax code in itself actually encourages us to accumulate wealth in certain places and based on where we choose to build our dollars, then we're going to be taxed accordingly when we go to spend it.
So most people have grown up believing that the best way to accumulate that million dollars, or whatever amount that is for retirement, would be under the heading of a retirement account, whether it's a 401k or a SIMPLE plan and things of that nature. And so, let's look at what happens to those people who've chosen that path.
First off, they typically have their money invested in the market. And I'm finding that when people are reaching retirement, they reach a point where it's much more important to actually preserve the dollars that they built. They don't want to be accepting that risk even though mainstream media would tell us that we have to accept risk. But back to your question about what does that $1 million dollars mean. Let's say you had a million dollars accumulated.
Emily [00:03:02] In an IRA or 401k or similar plan to that.
Emily [00:03:08] So the first question that people ask me, and sometimes they're right on the brink of retiring when they're asking this question for the first time, they say all right I've got my million dollars, now how much can I spend each year if I want to be certain or pretty certain I'm not going outlive my money.
Pam [00:03:26] Yep I'm right there.
Emily [00:03:29] Well because of that, the financial industry
Emily [00:03:35] walks through a regular study. You can look up the Trinity study or the Monte Carlo theory, if you like, and they consider things such as what is average life expectancy and what are the ups and downs the volatility of the market. And how do those two things affect the amount that someone should withdraw in retirement if they want a 90 percent chance of not outliving their money. This is known as a Safe Withdrawal.
Pam [00:04:12] Safe sounds good.
Emily [00:04:15] I'm glad you like that. Well, here's the thing. When I got into this profession over 30 years ago, we were telling people 8 percent! Then, it has dropped and dropped and dropped.
Emily [00:04:29] And so today most commonly, you'll see 3 percent or 2.8 percent, actually, as the recommended amount.
Pam [00:04:38] Just 3 percent. Wow. OK. That's disturbing.
Pam [00:04:47] So what do I do for the rest of my expenses? You know I'd like to travel. I'd like to donate money to some causes that I'm passionate about. 3 percent is not going to cut it.
Emily [00:05:04] 3 percent's not going to cut it and it's really not 3 percent.
Emily [00:05:07] So if I can finish the rest of that thought process for you first, Pam, I can really answer your question. If you're taking 3 percent and you have a million dollars that means you're going to withdraw thirty thousand a year.
Emily [00:05:27] Here's the kicker though. That 30,000 doesn't sound great but it's not 30 for you to spend because you chose to accumulate wealth where the industry teaches most of us, which is in a retirement plan, which means none of this money has been taxed.
Emily [00:05:43] Now you're going to subtract federal tax from that.
[00:05:52] Depending on where you live, you're going to subtract, in most states, state tax.
Emily [00:05:57] Now that distribution, that withdrawal, of $30,000 will quite likely cause you to pay tax on Social Security, which is a topic for another day. And it could in fact cause you to pay more for your Medicare. And you pay fees on that money all along the way.
Emily [00:06:25] Let's count up what happens to that $30,000. Let's see. Federal government, state government, Social Security tax, Medicare increases and fees every single year in retirement following what traditional planning teaches us. You're sitting there 6th in line and you get to spend whatever's left over after these taxing authorities take what they believe is their fair share.
Pam [00:06:50] I thought $30,000 was bad but being paid 6th and then thinking about how much money that probably is. Yeah that's tough to hear.
Emily [00:07:05] Who's really making the money here? That's the sad part.
Pam [00:07:12] Exactly. Exactly. So this this is something I need to think about.
Pam [00:07:22] Do you have more that you'd like to share? Is there any more bad news?
Emily [00:07:27] There's no bad news. Here's good news. What if I can show you how
[00:07:32] this million dollars will spend as if it were three times as much. Would you want to know?