Key Points
- The points to consider when evaluating a retirement plan are almost the same for everyone. It doesn't matter if it's $10 million or $1 million.
- Having a degree of flexibility in what you plan to spend makes a huge difference.
- Don't underestimate how long you might live.
- Keep in mind that inflation has eroded everybody's purchasing power. $10 million in 2022 isn't what it once was.
Let's fantasize a bit. Let's talk about lottery-winnings-type money. If you had $10 million to retire on, how long would it last? And let's keep in mind that $10 million in the year 2022 is not what it was 10 years ago in 2012. In fact, in 2012 you only needed $7.5 million to purchase the same items that $10 million buys in 2022. This is due to inflation of course and as everybody knows, inflation in 2022 has been extremely high.
Why bother going through this exercise? Well, it's kind of fun, for one thing. And who knows, it might even actually apply to some people reading this.
But we'll also try to get a few lessons across that will apply even if it's more like $1 million you'll be retiring on. We will be using our accurate retirement planning software, WealthTrace, to run some interesting scenarios. You can build your own retirement plan for free using a free trial of WealthTrace as well.
We'll throw some bombs at the portfolio and see how it holds up. We'll see how pulling certain levers might affect the chance of a plan succeeding. These are points that matter to anyone considering retirement, with any amount of money.
Generally, although the amounts will vary, the rules remain the same. Here are the other factors (besides the war chest) that you'll care about in retirement.
Your Spending
We'll just go out on a limb here and say that, with $10 million in savings and investments, you would probably have a lot of discretionary spending.
By which we mean you could probably rein it in if you needed to. There could be exceptions to that assumption, of course. You might have a massive mortgage, for example. And a massive mortgage on a massive house might mean massive cooling and heating bills.
But more than likely, with that amount saved, you're able to live it up--and living it up is something you can decide to do or not to do. Things like luxury travel, dining out, and expensive car purchases can all be dialed up or dialed back depending on how the cash flows in retirement are holding up.
There is power in knowing how much of your spending is more or less fixed, and how much is up to you. This applies whether your retirement savings is $10 million or $1 million. For one thing, it can tell you how able you are to tamp spending down in case of emergency, such as a bear market or a series of unforeseen expenses.
Total Returns
This is related to the previous item for sure: What kind of total returns can you expect in retirement?
Conventional wisdom says you should expect to dial the expectations down, because you'll be more conservative with your investments once you retire. That is most likely true, though there are ways to keep investing in stocks in retirement and not lose any sleep.
Life Expectancy
You can look at family history and try to be objective about how healthy you are, but it's impossible to know with certainty how long you'll be around. Best to be conservative here, erring on the high side.
Let's put a sample client couple through the wringer. In the examples below, we assume a retirement age of 60 for both plan participants, and that $10 million in savings and investments. But we vary our assumed total returns in the first table; assumed annual spending in the second table; and assumed life expectancy in the third table. Then we run their plan through a Monte Carlo analysis.
| Spending | Life Expectancy | Avg Total Returns | Probability of Success |
| $300,000 | 90 | 4% | 37% |
| $300,000 | 90 | 4.5% | 52% |
| $300,000 | 90 | 5% | 68% |
| $300,000 | 90 | 5.5% | 80% |
| $300,000 | 90 | 6% | 88% |
| Spending | Life Expectancy | Avg Total Returns | Probability of Success |
| $325,000 | 90 | 5% | 49% |
| $300,000 | 90 | 5% | 68% |
| $275,000 | 90 | 5% | 84% |
| $250,000 | 90 | 5% | 93% |
| $200,000 | 90 | 5% | 100% |
| Spending | Life Expectancy | Avg Total Returns | Probability of Success |
| $300,000 | 98 | 5% | 57% |
| $300,000 | 95 | 5% | 68% |
| $300,000 | 92 | 5% | 77% |
| $300,000 | 90 | 5% | 84% |
| $300,000 | 85 | 5% | 95% |
The degree to which seemingly small changes to some of these inputs have such a big effect on a plan could be eye-opening for a lot of people. A few things jump out at us:
--In the first table, even a 50-basis-point change to total return expectations can take a plan from "comfortable" to "it's kind of hot in here." Probably this has to do with the kinds of assets we put this couple in, which we haven't really talked about. If their investments are on the volatile side, small changes in total return assumptions will can lead to wide swings in the probability numbers. (We are a big fan of dividend stocks to help smooth out some of that volatility.)
--Remember the part above about dialing down spending? You see what we're talking about here in the second table. If they can keep it to "only" $200,000 a year, they'll be fine; at $300,000 things start to get a little more questionable. There's more to a successful retirement plan than just picking a certain level of savings and saying "that's it, we're done."
--One of the biggest wildcards in a plan is life expectancy. This couple might think they're being reasonably conservative predicting they'll live to 90. But that's not uncommon these days--and the risk of running out of money if you live "too long" is not to be dismissed.
Another wildcard is how long this painful bout of inflation will last. So far it is having a major impact on overall prices and the stock market. It is usually best to be more pessimistic about variables such as inflation so you don't overspend and run out of money in retirement. Run inflation scenarios to see how your retirement portfolio holds up.
You may not have $10 million, but when it comes to retirement planning, you have the same concerns as someone who does. Getting a retirement plan in place using detailed, accurate information is critical, regardless of assets.
Setting a target for an amount to save before retiring is a good idea, of course, but it's not everything. There is a lot more to a successful retirement plan than just hitting your number. Sign up for a free trial of WealthTrace to build your own retirement plan and see how long your money will last.