Can $1 Million Cut It For Retirement?

Marc Lichtenfeld By Marc Lichtenfeld
Chief Income Strategist, The Oxford Club

Retirement Planning

When I was a kid, the idea of being worth $1 million was unimaginable. I figured that if I had a million bucks, I’d be living on Easy Street.

Boy, was I wrong…

If you have $1 million saved and think you’re rich, I’ve got news for you: You’re not even close.

Here’s why…

Let’s say you’re about to retire and want $100,000 per year to live off of (not including Social Security or pensions). If we assume you’re going to need to make the money last for 25 years, inflation will be the historic average of 3.4% and your nest egg will yield 5% (which is aggressive in today’s low-interest rate environment), then you’ll need nearly $2.1 million today to be able to withdraw $100,000 per year (in today’s dollars).

By the time you get to year 25, you’ll need over $222,000 per year to keep up with inflation.

Let me repeat that: To draw down $100,000 every year for 25 years, you’ll need $2.1 million today. And you better hope your investments keep up with inflation or you’ll need even more.

So, if you have $1 million tucked away, I’m not saying you’re poor… But you’re far from retiring wealthy.

The Government Isn’t Going to Bail You Out

According to the U.S. Social Security Administration, the average Social Security monthly benefit is $1,230 per month, or $14,760 per year. So if we include Social Security in our retirement calculation, we need $85,240 per year in order to achieve $100,000 in spending money.

For that you’ll need $1.8 million.

If you have $1 million today that you can tap for retirement – using the above assumptions of 3.4% inflation and a 5% yield on your investments – you’ll be able to take out $47,800 per year. When we include the average Social Security benefit, that comes out to $62,560.

For some people, that figure might work. Particularly if you live alone and have low or no housing costs.

But for a couple, that’s not a ton of money.


Because you also need to count on spending a minimum of $4,300 per person in medical expenses per year… And that’s based on today’s figures. Who knows what out-of-pocket medical costs will be in 10 or 15 years?

Plus, consider all of the other expenses it takes to live: food, utilities, clothes, entertainment, travel, spoiling the grandkids… All that adds up.

If you live in an inexpensive part of the country and have a modest lifestyle, $62,560 per year may work fine for you. But if you want to enjoy retirement – and I’m not even talking extravagantly – like going out to dinner with friends, seeing a show and traveling to visit family, you’ll likely need more than that $62,560 per year.

And if inflation goes above the historic average, even for just a few years, that will really eat into your savings.

So, if you’re not retired yet, the most important thing you can do now is save. Do whatever it takes to put more money away.

Obviously, I’m sure I’m not the first person to tell you that. You’ve heard it before, so I’m not going to nag you about it.

But I may be the first person to tell you how to increase the longevity of your nest egg… Even if all you have is $1 million.

How to Make $1 Million Last

If you’re retired now with $1 million, we can make the money last longer or provide more income for you over the long term.

We can’t change how much money is in your retirement account today. Nor can we control inflation. But we can determine how that money works for us.

The answer is dividend stocks.

But not just any stock that pays a healthy dividend. You want a stock that’s raising its dividend year after year to keep ahead of inflation.

These are what I call Perpetual Dividend Raisers.

There are stocks out there that have track records of raising their dividends spanning decades. And some companies raise the dividend by an average of 10% or more per year.

If you build a portfolio of stocks with an average starting yield of 4%, and those companies raise the dividend by an average of 10% per year, you’re just about home free.

Here’s what I mean…

I showed you that at 3.4% inflation and a 5% yield, you’d need $1.8 million to be able to withdraw $85,760 in today’s dollars per year for the next 25 years.

However, with Perpetual Dividend Raisers (PDRs), at a starting yield of 4% – that boost their dividend by 10% per year – you can receive the same $85,760 with… Wait for it… $1 million.

By increasing the dividend 10% per year, your investments are staying well ahead of inflation. And as the years go by and that growth compounds, you’ll receive more and more income, offsetting the decrease in your principal.

Think about how great that little secret is: Simply by choosing the right investments, you need 45% less capital ($1 million versus $1.8 million) to fund your retirement and be able to live a comfortable lifestyle.

How Much Money is Needed to Retire?

That’s why we need to do our homework.

We need to find companies with attractive yields that raise their dividends by a meaningful amount every year.

Don’t fret… At Wealthy Retirement, we’ll help you along the way with articles on where to find these stocks, what to look for to ensure the dividend is safe, and we’ll even give you a few stocks to look over.

Because we’re facing a new reality: $1 million isn’t what it used to be.

And I’ll admit, it seems a little odd to say that.

That’s why our future has to be in own our hands, not anyone else’s. We need to make sure we’re in the right investments so that our retirement funds work as hard for us as we did for them.