When a Million Isn’t EnoughSubmitted by Bernhardt Wealth Management on December 17th, 2018
As odd as it may sound to some people, having a million dollars in your retirement account may not guarantee you a financially secure retirement. Several variables could erode your savings much quicker than anticipated, making that million dollars dry up too soon. Here are three common scenarios:
Extended periods of low interest rates. Though rates have edged upward slightly over the last few months, on December 14, the 10-year U.S. Treasury bond was hovering just below 3%. For ultra-conservative investors who demand absolute U.S. government backing for their money, that means that $1 million of invested assets earns less than $30,000 annually, which equates to earning about $14/hour, with no vacation—not exactly enough to fund a sumptuous lifestyle. And some analysts believe we may be in a cyclical period of low interest rates that could last for decades. (For a historical context, for example, interest rates averaged below 4% in Great Britain for nearly a century, from 1820 until the beginning of World War I.)
Rising healthcare costs. Two areas of the economy—healthcare and higher education—have far outpaced inflation for many years. For retirees, who are aging and therefore encountering health problems with increasing frequency, healthcare costs perennially top the list of retirement concerns. Having a million dollars in the bank may seem like plenty of cushion, but when treatment for a single catastrophic illness or an extended nursing home stay can absorb funds in chunks of $250,000, that nest egg looks a little less secure.
Increased longevity. People are living longer, and longer lifetimes require higher levels of funding. An April report by the Employee Benefits Research Institute indicates that for the “long-lived elderly”—those who live to age 95 and beyond—healthcare and other costs can rise to ten times the rate experienced by retired persons aged 70-74. And the trend toward longer lifetimes is clearly increasing, as indicated by the most recent data from the U.S. Census Bureau. (The problem is worse for women, by the way, who can expect to live, on the average, five years longer than their male counterparts.)
Of course, you should discuss these matters with your financial advisor to determine whether your retirement portfolio can withstand these and other portfolio withdrawals in retirement.