Why Even A Million Dollars May Not Be Enough
If you began saving when you first started working, then you should give yourself a pat on the back because you’re way ahead of most other Americans. And if you were really diligent in your efforts from an early age, it’s possible that you could even be sitting on a nest egg of somewhere in the neighborhood of a million dollars.
That’s not what anyone would call chump change by any stretch of the imagination and you can bet that there are probably lots of people who would love to be in your financial shoes.
With that kind of money sitting in investments, you would be excused if you thought you were going to be set for life when the time comes to retire. But unfortunately, that’s not necessarily going to be true. Although a million dollars is still a lot of money, it’s not worth as much as it once was. For a number of reasons, its value has been eroded.
Why Your Retirement Dollars Aren’t Going To Stretch As Far
The fact is that in order to have a stable retirement income, you have to be able to live off of the interest paid out by your investments, without touching the principal. Years ago when interest rates were sky high, a million dollars returned a very good annual amount of cash to live on. But that’s not the case today.
For starters, the rate of interest paid out on almost any kind of stable investment is extremely low. It has been that way for some time and there is no reason to expect any major changes in the foreseeable future.
You only have to look at the rate of interest that banks and investment companies are offering for money invested for 5 years or longer to understand that. If an increase was foreseen, you could bet that they would be offering higher rates over the long term.
Interest rates have been stuck in low gear as the government scrambles to stimulate the economy. They’ve done that by providing families with the ability to actually afford to take out a mortgage on a house, and have kept credit card rates of interest low enough that families are able to balance their budget.
In addition to low interest rates, inflation has been another big factor in eroding the value of money that you have to spend on basic needs like food, housing, clothing, gas, and medical expenses. And well let’s face it; prices continue to rise on practically everything, whether it’s a need or a want.
If young people are faced with difficult choices as they try to figure out how to find money to sock away for the future, the situation for those nearing retirement is even more difficult.
Flaws in the Conventional Financial Retirement Strategy
Conventional financial wisdom has always been to invest in riskier ventures when you are young, so any collapse in value can be recovered over time. Older investors on the other hand have generally been counseled to be conservative in their investment strategy. Often that meant investing in safe vehicles like government bonds or guaranteed investment certificates (GICs).
That strategy sounds good on paper, but the reality is quite a bit different. Returns on those types of bonds and on GICs are currently so low that it would be virtually impossible to live solely on the interest generated every year, even if you did have a million dollars in your portfolio.
To withdraw the rule-of-thumb 4% of the value of your million gives you $40,000 a year minus taxes and inflation, to live on. That’s enough to be comfortable but certainly doesn’t assume a luxurious lifestyle.
But you probably won’t be earning anywhere near $40,000 from the interest paid on your investments, so that means that you may have to start dipping into your principal. That’s a slippery slope because the less capital investment you have, the less you’ll earn in interest.
Today you’re doing well if you earn a percent or two in interest. So, if your million dollar portfolio is only generating a two percent rate of interest, that means it’s only going to earn $20,000, leaving you with an annual shortfall of about $20,000. And as you are probably aware, $20,000 doesn’t go far today, so you will pretty much have to supplement this amount somehow.
At that rate, as unbelievable as it may sound, if you live long enough, (and life expectancies are on the rise) you could conceivably run out of money at some point before you die. And that’s starting with a million dollars.
But the hard cold truth is that only about 10% of Americans have a net worth of a million dollars at retirement, which includes the value of their homes. And if even these 10% will have trouble maintaining their usual standard of living, think about how much worse it’s going to be for the vast majority of Americans of retirement age who don’t have anywhere near a million dollars put aside.
What Are Your Options?
You do have a few options, but you may not like all of them.
For instance, Social Security will certainly help, but you can’t be completely dependent upon that source of funding to bankroll your retirement, especially if you’re used to having an income that tops $100,000 a year. Currently the maximum that Social Security pays out is about $31,000 annually.
Then there are the standard options of spending less or saving more. If you’re retired or close to it, neither of these options may be particularly appealing. After all, you’ve worked long and hard to get to the point of finally being able to start living your life the way you want to. It would be like taking a step back to have to consider making those kinds of changes at this point in time.
You could think about tapping into your home’s equity to generate some extra cash, but that kind of defeats the purpose of having a nest egg to draw interest from.
If you have a little extra expendable income, you could consider playing the stock market, but that’s never a sure thing especially if you are looking for a short term return on your investment. Another option is to dip your toe into the international bond market, but that is an iffy proposition at best in the current unstable market.
Of course there is the chance that you could earn big in the stock market or by investing in bonds, but you do run the risk of suffering big losses too.
When people retire they generally prefer to know where they stand financially so they can plan accordingly. You won’t get that if your portfolio is filled with stocks or risky bonds. And you really need to ask yourself if you could survive a significant loss in the value of your investments at this stage of your life.
The only real option for many is to keep on working. Social Security increases every year until age 70, so you’ll be able to draw more when you do finally retire.
But you have to be physically able to perform your duties, and make no mistake; everything gets harder as you age. And will your employer want to continue to employ someone who is old enough to retire even if you do want to keep working?
A Real Solution
There may be a better way. Many people have discovered how to supplement their retirement income without having to go out and get a new job or continue on at their current one, and there’s no reason why you can’t do the same thing. It’s the kind of work that allows you to generate some of the best kind of income there is – residual income.
If you’re not familiar with what that is, one way to describe residual income is that it’s money that is earned over and over for work that is done once. An example of residual income might be money earned for a rental property that you buy and fix up. But you won’t have to own property and rent it out in order to earn residual income.
Whether you’re close to retiring or already there, there is no time like the present to start creating a positive cash flow through residual income.
There are many simple small business models that once set up and running, have the potential to earn you a significant amount of money each and every month. It could be the difference between being able to retire and live the lifestyle you’ve grown accustomed to, and not being able to afford to retire at all.
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