Why even $1M may not be enough for retirement

You've been saving like a miser to get ready for retirement. You've pinched pennies, kept that last car for what seems like an eternity. And now you've banked a cool $1 million for your retirement years.

Think you're set?

Well, you very well might be. Then again, you still might be short.

"The good news is there are more millionaires," says Richard G. Dragotta, at LPL Financial in Paramus, N.J. "Over 9 million people in the U.S. have $1 million or more." But, Dragotta says, $1 million might not mean you're wealthy: The new $1 million may be $2 million.

"Thirty years ago, $1 million was a huge amount of money," says Haitham "Hutch" Ashoo, CEO of Pillar Wealth Management, in Walnut Creek, Calif. "Today, given today's lifestyles and costs, it isn't so much money."

Why not? "It translates into $40,000 to $50,000 (annually) in sustainable revenue," says Joe Heider, regional managing principal for Rehmann Financial Group in Westlake, Ohio. "That is not that much money on an annual basis."

Heider says that 10 to 12 years ago, when people earned a lot more on their investments, $1 million could generate $70,000 to $80,000 a year in retirement income. But with interest rates as low as they are, that's not really feasible.

Still, that's not to say that no one could live on savings of $1 million. Not everyone will need that kind of cash in their retirement kitty, financial planners say. It all depends on your lifestyle — the one you're living now, and the one you want to live in retirement. It also depends on your investment returns, taxes and inflation.

"I think it depends on how much money you're going to spend," says Tim Courtney, chief investment officer at Exencial Wealth Advisors in Oklahoma City. "A million is not like $1 million 20 years ago or 30 years ago. If you're wanting to spend $50,000 a year or less from your investment portfolio, $1 million will probably get it done for you.

"If you want more than that, $1 million is not going to provide that for you," he says. Otherwise, you run the risk of depleting your savings before you die.

"Everything is relative," says Clarence Kehoe, executive partner in the accounting firm Anchin, Block & Anchin in New York City. "For some people, I would think $1 million would be more than enough. For other people, I can tell you some of these clients spend more than $1 million in a year. It depends on the person, their lifestyle and what they are used to."

Kehoe says hopefully, most of your bigger expenses are done with in retirement — children's college tuition and your mortgage, for example.

"If you contained those bigger expense, things are a little bit easier," he says. "But you have to realize there are new types of expenses. You have increased medical expenses, and you have all this free time. There's the cost of hobbies, the cost of traveling. That could be very expensive."

Pillar Wealth Management's Ashoo says even if you have $3 million to $10 million, but you want to jet all over the world, you haven't saved enough. "If a jet is not what you're after, if all you are looking for is a motor home to travel, then that's doable. It's about you and what you are trying to achieve. Do you have the right expectations?"

One mistake that people often make is that they assume that they will spend less in retirement, says Heider. "The reality is when someone retires in good health, they are more likely than not to spend more money," he says.

Heider says when people are not working, they have many more hours of time on their hands, to go to lunch, golf, shop and ski. Also, he says, "Most people have postponed dreams during working years, whether it's going to Europe, buying a second home or buying a motor home. They think they have saved enough, but they get into retirement and say, 'I wanted to do all these things, but I'm spending a lot more money.' "

Whether people have saved $1 million or $3 million, the individuals need to be realistic going into retirement, Heider says. "If they retire and realize they don't have enough monthly to sustain themselves during retirement, do they cut back on their activities, scale back?" he asks. Perhaps they could downsize their home or work part time.
"I've seen individuals who do something they like," he says. "They may work at a golf course so they can play golf for free. You just need to make adjustments in retirement."

Most of all, retirees need to have a financial plan and a cash-flow plan to see what they are going to need in their retirement years. "Retirement is all about cash flow," Dragotta says. "It's about the distribution of your wealth back to you. It's a constant battle, cash, vs. longevity, inflation and volatility. Depending on what your needs are, $1 million probably isn't enough.

"The days of pensions are long gone," he says. "If you have one you are in a better scenario. But most Americans aren't in that position. They have whatever they have accumulated. Even if it's $1 million. Add Uncle Sam's Social Security, that probably isn't enough."

Dan Cuprill, president Matson & Cuprill in Cincinnati, says if someone comes to him with $1 million for retirement, he can make it work.

"I think $1 million for most people is still adequate," he says. "There are parts of the country where it's more expensive. But $1 million is adequate for most people."

Cuprill says there are some exceptions, such as when people retire with big mortgages. "That's just poor planning."

Still, $1 million is a good starting point. "At the end of the day, if you want to have a quality retirement, to do what you want to do, I think you need at least $1 million," says Michael Wall, president and founder of Wall Financial Group, in Altoona, Pa., and Palm Beach Gardens, Fla.

"A lot of my clients are 50-plus," he says. "They are still from a world where they have a small pension. Some have real estate. Then there's Social Security. A lot of clients are in a place where they have lived below their means. They can live on a million.

"Not everyone will have $1 million," he says. "They will not have the ability to have as many choices, to do and go and buy and travel. I definitely would suggest that clients shoot to have at least that much. You are talking about 30 or 40 years of unemployment, called retirement."