A New York Times article discussed that a $1 million retirement nest egg isn’t what it used to be. While this is more than 90% of U.S. retirees have amassed, $1 million doesn’t go as far as you might think. That said I wanted to take a look at what it takes to provide a $100,000 income annually during retirement.
The 4% rule-
The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years. This very useful 'rule of thumb' that was developed many decades ago, although like any rule of thumb it is just that, an estimating tool. While it is a useful estimate, do not depend on this rule alone, build a comprehensive financial plan for your retirement.
Using the 4% rule as a quick 'back of the napkin' estimating tool allows us to see how someone with a $1 million in their 401(k) and any other retirement accounts might help get them to their hypothetical goal of $100,000 (before any taxes) per year. Note this is not to say that everyone needs a $100,000 or any particular amount during their retirement, but rather this example is simply meant to illustrate the math involved.
Doing the math-
The $1 million in the 401(k)s and IRAs will yield $40,000 per year (using the 4% rule). This leaves a shortfall of $60,000 per year. A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year. The shortfall is now down to $20,000
So how can you make up this potential shortfall-
Things to beware of in trying to boost your nest egg-
Paul R. Rossi, CFA