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Retirement planning: Assessing the million dollar retirement
How much does an individual need to retire comfortably? This question is the premise of retirement planning and its derivatives.
Normally, many persons – particularly those who don’t have it – say that one million dollars in cash/savings should be enough for them. One million bucks – a figure usually associated with financial independence and wealth.
However, whether one million dollars is enough is left to be seen. Given the plethora of retirement risks, lifestyle considerations and increases in the cost of living, one million might be sufficient today. Even if that is so, what about tomorrow’s retirees?
Money working for you
To determine how much a million dollars is worth to you, consider the financial concept of putting money to work for you. For example, if you have one million dollars saved and it yields 6% per annum, it fetches about $60,000 per year. If you worked for about $50,000 per year before retirement, that’s fantastic. However, for higher income earners, it may not be. If you reduce that million-dollar retirement fund, you’d have even less money working for you and reduced returns as well. This ultimately depends on your lifestyle and retirement goals.
Money management and discipline
Some persons could get more out of a dollar than others. For some, one million dollars represent a financial luxury; others would blow that in a couple of years or much less. Money management is the key to determining how long a retirement fund could last. Some persons acquired all they needed to during their working years, so they would not necessarily need a million-dollar retirement fund. However, others might have dependents or are paying off their mortgage. In such cases, a million dollars would be depleted easily. Others are so profligate that they would be tempted to spend the money instead of using the money working for you concept.
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Astute financial planning
Retirement planning should be undertaken in the context of financial planning. For instance, if you have your million, but no medical or long-term care insurance, you’re in a financially vulnerable position. After all, unforeseen medical expenses can wipe out your savings easily. During the global financial crisis of 2008, many retirees lost substantial amounts through investments. Some lost amounts close to or exceeding one million. Proper portfolio diversification is also necessary to combat market risks.
Another important point to note is that the accumulated retirement fund should not be viewed as completely independent of a reliable income stream. After all, the primary sources of income for the retiree are the accumulated fund and the income stream. There ought to be a balance between the two; an adequate income stream is likely to decrease the pressure to have an incredible accumulated fund.
For those who have many years until retirement, a million-dollar retirement may not be as impressive as it sounds. It is best to determine the value you would be comfortable with in today’s terms (present value) and project the future value. For example, if you think $700,000 is sufficient in today’s terms, then at a 4% inflation rate your accumulated fund required would be just over 1.5 million dollars.