I’ve written several pieces discussing whether or not a specific sum of money would be sufficient to retire on. A million dollars. Two million dollars. I run a fictitious saving and spending scenario by a hypothetical couple, and we observe the results. All of the scenarios in this post were calculated using the WealthTrace Planner, which you can use for free.
With $3 million this time, I wanted to try something a little different. I wanted to make some points that would apply to anyone thinking about retiring, regardless of how much money they have saved, since I know that not everyone will be in the fortunate position of being able to retire with $3 million. $3 million is not what it was in 2022, especially considering that inflation is close to double digits. Ten years ago, adjusted for inflation, $2. The current purchasing power of $3 million is equal to 25 million. In fact, the loss of purchasing power has been so great that some financial advisors think that the new standard for retirement savings should be $3 million.
This time, let’s look at a few variations for our couple. The base case is shown in the first row, and variations on it are shown in the subsequent rows.
Our 60-year-old couple is unsure if $3 million will allow them to retire at that age. They are hoping to retire pretty much immediately. Their $3 million is split equally between taxable and tax-deferred accounts. Aside from their cash holdings, the couple’s assets are distributed among various equity and fixed income investments, with nearly half of them being value stocks:
Recognize your assets: WealthTrace can examine your portfolio and provide information on the distribution of your investments.
The WealthTraces Monte Carlo simulator indicates that there is a reasonable 90% chance of success for the couples plan.
Yes, a couple can comfortably retire on $3 million in most cases. This substantial amount can provide a secure financial foundation for your golden years, allowing you to enjoy a fulfilling and worry-free retirement. However, several factors can influence how long $3 million will last, including:
Your lifestyle: A lavish lifestyle with frequent travel and expensive hobbies will require a higher monthly budget compared to a more frugal lifestyle focused on simple pleasures.
Your age at retirement: Retiring earlier means you’ll need your savings to last longer, requiring careful planning and potentially more conservative investment strategies.
Your investment strategy: The return on your investments can significantly impact how long your savings will last. A well-diversified portfolio with a mix of stocks, bonds, and real estate can potentially generate higher returns and help your money grow over time.
Your healthcare costs: Healthcare expenses tend to increase with age, so it’s crucial to factor in potential medical costs and plan accordingly.
Inflation: Rising inflation erodes the purchasing power of your money over time, so it’s important to consider inflation when planning your retirement budget.
Taxes: Depending on your investment strategy and income sources, you may need to pay taxes on your retirement income.
Social Security benefits: Social Security benefits can provide additional income during retirement. However, the amount you receive will depend on your work history and the age at which you start collecting benefits.
Here’s how you can determine if $3 million is enough for your couple’s retirement:
- Calculate your estimated monthly expenses: Consider your current spending habits and adjust them for your expected retirement lifestyle.
- Use a retirement calculator: Online retirement calculators can help you estimate how long your savings will last based on your age, income, expenses, and investment returns.
- Consult with a financial advisor: A financial advisor can provide personalized advice and help you develop a retirement plan tailored to your specific needs and goals.
Here are some tips to maximize your $3 million in retirement:
- Start saving early: The earlier you start saving, the more time your money has to grow through compounding interest.
- Invest wisely: Diversify your investments to minimize risk and maximize potential returns.
- Consider working part-time in retirement: Earning additional income can help supplement your retirement savings and provide extra financial security.
- Downsize your home: If your current home is too large or expensive to maintain, consider downsizing to a smaller, more affordable property.
- Travel during the off-season: Traveling during the off-season can help you save money on flights, hotels, and other travel expenses.
- Be mindful of your spending: Track your expenses and adjust your budget as needed to ensure your savings last throughout your retirement.
By carefully planning and managing your finances, a couple can comfortably retire on $3 million and enjoy a fulfilling and financially secure retirement.
Additional Resources:
- SmartAsset’s Retirement Calculator: Estimate your monthly retirement income needs.
- SmartAsset’s Financial Advisor Matching Tool: Find a qualified financial advisor to help you plan for retirement.
Remember, the key to a successful retirement is careful planning, wise investment, and responsible spending. By following these tips and utilizing available resources, you can ensure that your $3 million will provide you and your partner with a comfortable and enjoyable retirement.
Variations On The Theme
Capital markets are inherently volatile, of course. We are unable to forecast the future, particularly in the short term. Take a look at what the financial markets have accomplished in 2022 so far. We have only seen volatility like this in the last 15 years during the Covid-19 pandemic in 2020 and the financial crisis in 2008 and 2009. Therefore, we must examine the potential outcomes of throwing a monkey wrench into the plans.
As you can see, I changed a few of the inputs on the rows that follow the base case row in the table above. The inputs that I changed are in red.
The results of the changes make intuitive sense: Push retirement out by a couple or five years, and the probability of the plans success increases. Reduce spending and push out retirement, and the probability really increases.
Total Control. WealthTrace allows you to instantly run a plan through various what-if scenarios to see how any changes would affect the plan’s success. In this instance, we’re raising the retirement age and lowering living costs. Learn more.
I wanted to highlight a few instances that, while they may not be immediately apparent, anyone approaching retirement should be aware of. First is the detrimental effect of inflation. For the base case, weve assumed 3% inflation annually. If we achieve that percentage, our clients’ plans don’t perform nearly as well, providing a 0.664 percent chance of success.
In short, as time goes on, inflation gradually reduces your purchasing power. Over time, you will essentially have less money if the assumed inflation rate increases but the assumed total return number does not. Stress testing a plan’s resilience to an increase in inflation is a frequently neglected step.
Additionally, I wanted to draw attention to how this couple’s portfolio would be affected by a possible bear market. People who are getting close to retirement frequently don’t give this option much thought. There are occasions when they will have a withdrawal rate in their head of, say, 3% or 4%. They will have done the calculations and concluded that they will be fine as long as they adhere to that withdrawal rate and the markets stay stable.
But thats a little too much “as long as” for comfort, especially with a portfolio as dependent on stocks as this one. If a bear market like the one we had in 2008 hits this portfolio, the couple could be in big trouble. They would need to draw down on their portfolio even as it is dropping in value–a double whammy of sorts. The Monte Carlo simulation knocks the probability of the plans success to 36%.
Put It Through Its Paces: When considering retirement, be sure to take a broad range of scenarios into account and to use reliable resources such as WealthTrace for assistance. Learn more.
I might advise this couple to reduce their spending and have a less equity-heavy portfolio. For instance, if we invest half of that slug of valuable stocks in long-term bonds and cut annual spending to $90,000, the bear market will have a significantly less detrimental effect on the plan, with a success probability of approximately 80%.
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- While the goal amount of savings before retirement is important, it is not the only factor to consider. We examine retirement scenarios in this article, updated for 2022, using WealthTraces Retirement Planning Software, which is also accessible to the general public.
- Regardless of one’s savings level, the factors to take into account when assessing a retirement plan are nearly universal.
- It’s best to model “edge case” scenarios in advance because things like consistently high inflation or a bear market won’t feel like edge case scenarios if they occur during your retirement.
I’ve written several pieces discussing whether or not a specific sum of money would be sufficient to retire on. A million dollars. Two million dollars. I run a fictitious saving and spending scenario by a hypothetical couple, and we observe the results. All of the scenarios in this post were calculated using the WealthTrace Planner, which you can use for free.
With $3 million this time, I wanted to try something a little different. I wanted to make some points that would apply to anyone thinking about retiring, regardless of how much money they have saved, since I know that not everyone will be in the fortunate position of being able to retire with $3 million. $3 million is not what it was in 2022, especially considering that inflation is close to double digits. Ten years ago, adjusted for inflation, $2. The current purchasing power of $3 million is equal to 25 million. In fact, the loss of purchasing power has been so great that some financial advisors think that the new standard for retirement savings should be $3 million.
This time, let’s look at a few variations for our couple. The base case is shown in the first row, and variations on it are shown in the subsequent rows.
|
Retirement Age |
Living Expenses |
Additional Expenses |
Annual Return |
Wrench In The Works |
Probability of Success |
|
60 (both) |
$100,000 |
$7,500/yr for 20 years |
5.2% |
None |
81% |
|
60 (both) |
$100,000 |
$7,500/yr for 20 years |
6% |
None |
85% |
|
62 (both) |
$90,000 |
$5,000/yr for 20 years |
5.2% |
None |
94% |
|
60 (both) |
$100,000 |
$7,500/yr for 20 years |
5.2% |
Bear market in 5 years |
35% |
|
60 (both) |
$100,000 |
$7,500/yr for 20 years |
5.2% |
Inflation a full percentage point higher annually |
64% |
|
65 (both) |
$100,000 |
$7,500/yr for 20 years |
5.2% |
None |
90% |
Our 60-year-old couple is unsure if $3 million will allow them to retire at that age. They are hoping to retire pretty much immediately. Their $3 million is split equally between taxable and tax-deferred accounts. Aside from their cash holdings, the couple’s assets are distributed among various equity and fixed income investments, with nearly half of them being value stocks:
Know what you own: WealthTrace can look at your portfolio and tell you how your investments are allocated.
The WealthTraces Monte Carlo simulator indicates that there is a reasonable 90% chance of success for the couples plan.
Is $3 Million Enough to Comfortably Retire On?
FAQ
Can my wife and I retire on 4 million dollars?
Do Millennials need $3 million to retire?
How much does a married couple need to retire at 55?
What percentage of retirees have $4 million dollars?
Should you retire on 3 million?
If you’re wondering whether retiring on $3 million is viable, this article will help you decide. $2 million should be more than enough to fund your retirement, even if you choose to retire early. A number of factors are at play when determining how long $3 million will last, including your investment strategy and retirement lifestyle.
How much money should a retired couple have in a portfolio?
A $3 million portfolio will likely be enough to allow a retired couple to spend reasonably and invest with moderate caution without any worries of running out of money. However, if expenses rise too high, it’s entirely possible to drain a $3 million portfolio in well under 30 years.
Is 3 million enough to retire at 65?
To some people, $3 million will sound like a lot. You probably think $3 million is enough to retire if you’re among that crowd. But retiring with $3 million at 65 can last depending on your longevity, lifestyle and other factors. Let’s break down what you need to consider when determining how much you can afford.
Is 3 million in retirement savings enough?
$3 million in retirement savings is a sizeable sum. With this amount of money in your pocket, you could afford to retire even earlier than planned. $3 million could also be enough for you to retire even earlier, at 40 or even 30, depending on the kind of retirement lifestyle you’re after and the sorts of expenses you’ll face month to month.