How Long Will $1 Million Last Your Clients in Retirement?

By 1981, when the first millennial was born, the spending power of $1 million had fallen to $2.8 million 2019 dollars.

If your clients retire with $1 million this year, at the age of 65, and inflation averages 3%, that $1 million will feel like just $744,000 in 2039, when your clients are 85.

3. Uncle Sam

Of course, another important wealth-eroding factor for your clients to consider is income taxes.

Your clients may understand that they can take $1 million out of a Roth IRA, once they’re over the age of 59.5, without federal income tax consequences.

If Mr. and Mrs. Retiree had the $1 million in their non-qualified joint brokerage account, and they tried to live only off of the account interest, taxes could reduce their annual take-home income from the account to $28,000.

4. The Markets

Still another wealth-eroding factor for your clients to think about is, of course, the markets.

When John Pierpont Morgan was asked what he expected the stock market to do, he famously answered, “It will fluctuate.” These fluctuations can wreak havoc on your clients’ nest egg, or help modest funds grow to support a golden retirement.

You can use the discussion about this to introduce a concept known as the sequence of returns.

If Mr. Retiree and Mrs. Retiree were to average the same rate of return on their portfolio’s during retirement, but Mr. Retiree experiences bear markets in the early years of distribution, whereas Mrs. Retiree experiences bull markets during the same years, his money risks depletion far earlier than hers.

This is where averages can be somewhat misleading. Note the classic example of an investor with $1 million losing 50% in year 1 and gaining 50% in year 2. In that scenario, the portfolio average annual return is 0%, but there is $250,000 missing. This is where distributions can make an investment more fragile.

So how long will $1 million (or, at least, $1 million held outside an annuity with a lifetime benefit period) last in retirement?

I don’t know, you don’t know, nor does anyone else.

I’ve explored three major wealth-eroding factors here in isolation. Some of the other many issues that affect the longevity of $1 million include housing costs, food, insurance, transportation, vacation, legacy goals, dependents, location, additional income or financial resources, long-term care, and the ultimate risk/reward multiplier: life expectancy.

Here you should explain to your clients that proactive financial planning can mitigate risks and potentially make $1 million last longer.

When I’m talking to my new clients, I make this part of the conversation a call to action. I encourage them to learn more, by subscribing to my podcast series or by reading my book.

— Connect with ThinkAdvisor Life/Health on Facebook, LinkedIn and Twitter.

Bryan Kuderna, CFP, RICP, LUTCF, is the founder of Kuderna Financial and the author of Millennial Millionaire — A Guide to Become a Millionaire by 30. He is a member of the Million Dollar Round Table.