No Easy Retirement Rules

Lewis Walker |


A recent Wall Street Journal article delved into “Glimpses Into the Reality of a $1 Million Retirement” nest egg. The 12/28/2022 piece noted, “Once a symbol of extravagant wealth, $1 million is now the retirement savings goal for millions of Americans.” The question for you may be, “Given inflation, taxes and other personal challenges, do I have enough with $1 million in today’s dollars?”

Previously this column cited the work of Thomas Stanley and William Danko who authored The Millionaire Next Door, a best-selling book that defined a threshold level for wealth achievement as having a net worth of $1 million or more.  By the end of 2022 it took a net worth in today’s inflation adjusted dollars of $1.89 million to equal the $1 million level specified when the book was published in 1996. If you were to ask a financial planner if a $1 million retirement nest egg is sufficient, the answer must be, “It depends.”  Along with time frames, the planning variables are myriad.

How long before you wish to retire, or at least, proclaim yourself as being “financially independent”? Use an inflation calculator to determine the buying power of future dollars based on your time frame. Say you’re 45 and want to be financially independent by age 65. In 2043, it will take $1,638,616 to equal $1 million in 2023 dollars if inflation averages only 2.5% per year. The economy and stock and bond markets are struggling as the Federal Reserve Bank raises interest rates in a battle to get inflation down to an annual rate of 2%. Playing with various assumptions and time frames will make you dizzy, but asking “what if?” questions can be useful in weighing variables as you attempt to visualize potential future reality.

In addition to inflation, taxes erode the net purchasing power of your gross earnings. You must consider both current and potential future estate and tax policies. Retirement money coming out of a qualified retirement plan like a 401(k) or Individual Retirement Account (IRA) is taxed as ordinary income. For accounts like a Roth IRA or Roth option in a 401(k) plan, you invest after-tax dollars today so as to harvest tax-free dollars tomorrow. Will harvested dollars from personal non-qualified plan sources be subject to ordinary income or short- or long-term capital gains rates? More favorable long-term capital gains rates are blasted by some as a sop to the wealthy, as in “Warren Buffett pays a lower tax rate than his secretary.” With our national debt out of control, raising taxes on the so-called rich is a call. At $1,ooo,000 plus in liquid net worth, you will be tagged as “rich.” Count on it! A discussion of tax strategies that are available today is key to optimal future planning.

When you begin to tap your nest egg to provide retirement cash flow, how long do you estimate you will live and need money? Based on your age, and that of a spouse or partner, how long will the money have to last? Do you wish to pass assets to heirs and/or qualified charities? Will you be debt free on your retirement date? What will be your health care needs and how will they be funded? Will life insurance be in place to bolster the financial freedom of a survivor? Will life insurance also be used as a vehicle to support long term care needs or pay potential estate taxes?

How much of your nest egg will be tied up in a qualified retirement plan subject to ordinary income tax upon withdrawal? How much will be held in personal non-retirement funds where more favorable long-term capital gains rates may apply? How does Social Security play into retirement cash flow planning? Medicare is not free and costs for supplemental insurance plans rise every year.

Travel often is mentioned as a retirement goal. Well, “Why wait until retirement?” Suppose Italy is on your bucket list. Round trip tickets for two on Delta to Rome this fall can cost about $3,138 in main cabin (coach), $3,838 in economy comfort, $6,662 in premium select, and $11,698 in business class. Careful shopping may reduce expenses but the point is that when it comes to travel, comfort and style costs far more than the basics. A windowless  inside cabin on a cruise ship costs much less than a suite with a balcony, but is that your idea of a good time? When saving for retirement, what level of freedom, flexibility, comfort, and style do you wish to aim for?

What other variables may impact the formulation of your financial plan? How secure is your job and earnings stream from employment? If you’re self-employed how secure is your income stream and what’s the potential future selling price for your business? Do you have sufficient insurance (life, health, medical, disability, liability, property and casualty, long-term care) to deal with the vagaries of life? Are current and proper legal documents in place such as powers of attorney covering assets and heath care, beneficiary designations, wills, and/or trusts to deal with incapacity and death, special-needs children, and taxes?

These questions and more play into the investment strategies that you will pursue. Your current earning power and net worth, future projections, time frames, risk posture, tax considerations, inflation assumptions, current health status and long-term outlook, family obligations, debt levels, current planning for emergency situations and “what if?” questions, and other factors govern your financial planning strategies.

If it sounds complex, it can be. That’s why independent financial counsel is encouraged. But if you think planning can be complicated, try winging it!