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06/29/2018 01:39 pm ET Updated Jun 29, 2018

I Call BS On Needing $1 Million To Retire (And Other Bad Retirement 'Rules')

Today's retirement advice badly needs a facelift.
We're ignoring a giant elephant in the room.
WaffOzzy via Getty Images
We're ignoring a giant elephant in the room.

Ann Brenoff’s “On The Fly” is a column about navigating growing older ― and a few other things.

The big question people always ask when it comes to retirement is “How much money do I need to save to retire comfortably?” And the big answer ― $1 million ― sends many of us into a head-first tailspin.

But before you say, “I’ll take that cat food in bulk, please,” consider this: 
A lot of what you hear in the way of retirement advice is 50 shades of wrong. And yes, I’d include the idea that you need to save $1 million in that. It’s time to rethink some popular “truths” about retirement. (No, this does not give you permission to stop saving!)

1. The ‘you need $1 million’ advice was really never applicable across the board.

When the financial planning and money experts said that $1 million was the magic amount you needed to have for a comfortable retirement, they didn’t actually mean everyone of all ages. It really only applied to people who were currently at or near retirement age. If your retirement was decades out, you actually would need more money. So raise the bar on your impossible dream.

Blame inflation for this one falling apart.

Here’s the math, as Mark Avallone, president of Potomac Wealth Advisors and author of Countdown to Financial Freedom, told CNBC last year: A 67-year-old baby boomer who retires today with $1 million can generate an annual income stream of $40,000, which assumes a withdrawal rate of 4 percent. 

But Gen-Xer who is 42 and retires with $1 million in the bank when he is 67 will wind up with just $19,000 a year after inflation ravaged his savings. And a 32-year-old millennial planning to retire at 67 with $1 million in savings will actually be below the poverty line.

Yep, million-dollar poverty. That universally applied “you need $1 million to retire” advice wasn’t ever a one-size-fits-all.

2. Plus, it ignored the elephant in the room.

That $1 million target also has a fatal flaw: Those projected annual incomes from your investments are actually pretty fluid, not set in stone and certainly not guaranteed.

What you earn from investing that $1 million ― or any amount ― will depend on the direction the markets take. If the markets crash, your $1 million portfolio can swiftly shrink to $500,000. Think it couldn’t happen? The Dow hit its pre-recession high on Oct. 9, 2007, when it closed at 14,164.43. Less than 18 months later, it had dropped more than 50 percent to 6,594.44 on March 5, 2009. Big ouch.

3. Most retirement advice is premised on the 4-percent rule, which is flawed at best.

This rule was introduced by William Bengen, a financial planner who believed that retirees could deduct 4 percent from their investment portfolio every year and not run out of money for at least 30 years. To do this, he said, retirees needed a portfolio balanced with 60 percent in stocks and 40 percent in bonds and a commitment to just withdraw 4 percent a year (adjusted for inflation.)

This is a case of the devil living in the details. 

The 4-percent rule is conditioned on the idea that all our portfolios will be a precise 60/40 mix, which doesn’t take into account an individual’s tolerance for risk. That’s a big deal and a huge omission. How much of a gambler are you with your retirement savings?

If you are risk-averse, as many close to retirement are, you may prefer to put 80 percent of your investments in bonds, which are considered safer but deliver less of a financial bang. If your risk tolerance is such that your investments are split differently than 60/40, it messes up the 4-percent rule.

4. ‘The multiply by 25’ rule is equally imperfect.

The “multiply by 25” rule and the 4-percent rule are often confused with one another, but they have very different purposes. The 4-percent rule estimates how much you can withdraw without going broke. The “multiply by 25” rule tells you how much you need to save based on how much you hope to spend.

The “multiply by 25” rule says to multiply your desired annual income in retirement by 25. So if you want to have an annual income of $50,000 per year, you would need to have $1.25 million saved. To withdraw $60,000 per year, you need $1.5 million.

This calculation is imperfect for several reasons, chief among them that it doesn’t take into account the other sources of retirement income you may get ― most notably, Social Security, private pensions, or income from other sources such as rental properties or part-time jobs. All of those things should be factored in before you determine how much income you need your savings to contribute. 

But it also doesn’t answer a much larger and looming question: How the heck is someone in their 20s or 30s supposed to know how much they will need to live 50 years in the future? How can they guess accurately what financial events lie ahead? Will they inherit money or wind up spending their own savings on caregiving for a parent? Will they have bought a home and paid it off or still be shelling out rent? Will they need to help their adult children pay off student loans?

You might as well ask the Magic 8 ball. 

5. A lot of retirement advice should come with an expiration date.

That 4-percent rule was developed during the mid-1990s when bond interest rates were higher than what they are now. Too bad that bonds don’t see the same sort of growth today that they did years ago. Interest rates that have been low for a long time have made bonds and CDs less attractive when compared to equity returns.

So why are we still basing a retirement plan on the idea that 40 percent of our investments should be held in bonds?

And here’s another dated retirement premise: The 4-percent rule is designed to stretch your retirement savings to last for 30 years. But some of us may not need 30 years of retirement income; we may need less or more. Many people are now working past traditional retirement age. And while longer life expectancies have altered the picture, it is still just 78.7 years in the U.S. 

The Pew Research Center analyzed data from the Bureau of Labor Statistics, and it found that during the first half of 2017, 19 percent of 70- to 74-year-olds were still employed. That’s roughly 8 percent more than there were in the mid-1990s, when the 4-percent rule was first introduced. And while optimism is a beautiful and wondrous thing, only 10 percent of people who are 65 today will live past 95, according to projections from the Social Security Administration, which raises the question of why we all need to plan for a 30-year retirement. Most of those “oldest of the old” will be women, who as a demographic have lower earnings and less money saved than men, but higher life expectancies. 

But still, why are we encouraged to prepare for retirement’s nuclear option when, for most of us, it won’t be necessary?

6. The $1,000-a-month rule is either the cherry on your cake or pie in the sky.

This rule of thumb says that for every $1,000 per month you want to have in retirement, you need to have $240,000 (some say $250,000) saved.

What really might be useful, of course, is to tie this advice to a little guidance on how to do it, since clearly we are failing the savings test. (Make that guidance coupled with public policy.)

Around half of all U.S. households have no retirement accounts at all, says the Government Accountability Office. Not a pension, not a 401(k) or an IRA. And that’s not just young people who plan to enjoy themselves now and worry about it later. The GAO says almost 30 percent of households headed up by someone age 55 and older have nothing saved for retirement.

And yes, that’s scary.

According to the just-released 2018 report from the nonprofit Transamerica Center for Retirement Studies, we are all pretty worried about having enough money to retire, with Gen-X worried the most. Only 55 percent of Generation X workers reported being “somewhat or very confident” that they will be able to fully retire, compared to 67 percent of millennial workers and 62 percent of baby boomers.

So, to summarize why our retirement rules may not exactly lead to the advertising image of a hand-holding stroll down the beach: Nobody can really say how much money you need to retire. Nobody knows how long you will need that money to last, what lifestyle adjustments you are willing to make when you retire, or what unexpected expenses may upset your best-laid plans.

The best answer may be this: Own your retirement instead of letting it own you.
Save as much as you can and remember that what really counts isn’t just the goal of retirement but the journey to get there. When the music stops, what you have is what you have and you will adjust your lifestyle to that. You got this.

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