Welcome to the 19th issue of Metrix that Matter, a weekly newsletter from WEALTHMETRIX that helps you focus on what matters most for building and sustaining wealth. Every Saturday, we share an educational essay with actionable takeaways to guide you on your journey to financial independence.
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What you’ll learn in this issue:
- Why you should be asking a different question first
- How to figure out how many years your portfolio could support your lifestyle
- What your Total Term score reveals about your retirement readiness
- When it’s time to seek professional guidance
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“Is $1 million enough to retire?”
I was recently asked this question, and it’s certainly not the first time.
Sometimes the number changes – $500K, $2 million, $5 million – but the underlying question remains the same.
We all want a simple, clear target to shoot for. A specific number that tells us we’ve made it and can finally relax.
But here’s the problem: it’s not the first question you should be asking.
Rather than asking how much you should SAVE for retirement, you first need to understand how much money you want to SPEND in retirement.
A better starting point
Start by thinking about your everyday living expenses. What does it cost to maintain your current lifestyle? Housing, utilities, groceries, insurance, healthcare, transportation – all the basics that keep life running smoothly.
Then start adding up all the fun things you’ve been dreaming about. Travel, hobbies, time with grandchildren, charitable giving – whatever brings you joy and purpose. These retirement goals need to be part of your spending plan too.
Add up your “reliable income”
Once you have a realistic picture of your total annual spending needs, the next step is to identify your reliable income sources. These are the income streams you can count on, year after year, regardless of what’s happening in the markets.
Social Security is the most common example. You may also have a pension from your current or previous employer. Maybe you’re planning to work part-time in retirement, or you have rental properties generating income. All of these sources reduce the amount you need to pull from your portfolio.
Back to the first question
Now we’re getting closer to an answer for the first question, understanding if a $1 million portfolio is enough to retire.
Figure out the difference between the two numbers you just calculated: your annual spending and your annual reliable income in retirement.
What’s left is the amount you need from your investment portfolio each year.
Annual Retirement Spending
– Annual Reliable Income
Spending Needed from Portfolio
Now here’s the critical calculation: divide your current portfolio balance by the amount of spending you will need from your portfolio. The result is what we call your Total Term score: the number of years you could live on your investment assets based on your current spending, if neither changed.
Current Portfolio Balance
÷ Spending Needed from Portfolio
Total Term Score
This is obviously a hypothetical number, as your portfolio balance and spending needs will change every year in retirement. But it gives you a good baseline for understanding where you stand today.
Here’s a simple example. Let’s say you need $80,000 per year to live comfortably in retirement. You plan to receive $30,000 a year from Social Security and $10,000 a year from a small pension. With $40,000 of reliable income, you’re left with $40,000 that will need to come from your portfolio annually.
If your portfolio is worth $1 million, your Total Term score is 25 years ($1,000,000 ÷ $40,000). As of today, your portfolio could support 25 years’ of spending.
What if you increase your spending from your portfolio to $50,000 a year? Your score drops to 20 years.
What if you only need $25,000 from your portfolio? Your score jumps to 40 years.
Same portfolio size, but very different runway depending on your spending needs.
Understanding your number
So, what does your Total Term score tell you?
Over 30 years: You're in a strong, conservative position. Your portfolio has substantial capacity to support your retirement lifestyle. You might consider increasing your retirement spending, accelerating other goals, or simply enjoying the security of knowing you have a significant cushion.
Between 20 and 30 years: You're in the ballpark of a sustainable retirement. This range has been extensively studied and, historically, has provided a reasonable balance between income and portfolio longevity. You're not bulletproof, but you're in solid territory.
Less than 20 years: This is a signal to pause and think carefully. A term score under 20 years means your portfolio might not last as long as you need it to, especially if you’re planning a 30-year retirement. It doesn't mean retirement is impossible, but it does mean you may face tough decisions down the road. You might need to adjust your spending plan, consider working longer to build more assets, or explore part-time work in retirement to reduce the draw on your portfolio.
Why these are just guidelines
What’s important to remember is your Total Term score is a snapshot based on today's numbers. It assumes no investment growth and no changes to your spending, which isn't how real life works.
Your actual retirement sustainability depends on numerous factors. Market conditions when you retire matter enormously. Your asset allocation, tax situation, healthcare costs, and life expectancy all play a role. If you retire at 55, you need a higher term score than if you retire at 70.
And then there's the complexity of real life. Maybe your spending won't be consistent year to year. Perhaps you have big travel plans for your first few years of retirement, then expect to slow down. Or maybe you're planning to downsize your home in a few years, which would increase your portfolio and improve your term score.
If your situation involves varying spending needs, multiple income sources that start and stop at different times, or any number of other real-world complications, you're beyond the realm of simple calculations.
This is a scenario when it makes sense to work with a CERTIFIED FINANCIAL PLANNER® professional to run a full retirement projection analysis.
The real answer
So, is $1 million enough to retire?
Maybe. Maybe not.
It depends entirely on what you need that million dollars to do for you.
For someone who needs $25,000 per year from their portfolio, a million dollars provides a term score of 40 years, which is great. For someone who needs $80,000 per year, it's a term score of just 12.5 years, a very different story.
The number that matters isn't the balance in your account. It's the relationship between your portfolio size and your annual spending needs.
Figure that out first. Then you'll know exactly where you stand and what you need to change to retire with confidence.
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READY TO IMPROVE YOUR FINANCES?
Thank you for reading. If you would like help calculating your Total Term score, I invite you to click the link below to gain access to our financial planning tool, Elements.
After signing up, you will be guided through a series of basic questions about your income, spending, debt, and account values. Once complete, Elements will provide a snapshot of your current financial health, as shown below.
You will then have the opportunity to schedule a complimentary meeting with me (Zoom or in-office), where I will review your current situation and discuss a few ways to make improvements.
CHECK YOUR FINANCIAL HEALTH IN 10 MINUTES
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