One million dollars was the magic number for retirement; if you had a million, you could afford anything. Today, people are questioning if one million dollars will be enough for retirement. How things have changed in just a few years.
The answer to the “Will one million dollars be enough for my retirement?” question is of course – ‘It depends’
There are so many factors to consider, some known but most are unknown. In this post we will look the key questions that retirees should ask about their money needs in retirement.
1 – What income can I expect from one million dollars at retirement?
Any income will come from the investment returns (mostly interest and dividends).
If you decide to invest only in bank term deposits and cash, the interest rates (July 2015 in Australia) are just under 3%. For simplicity, lets assume 3% and this rate will produce an yearly income of $30,000. This income is less than the $33,716.80 that the married couple Age Pension payment from the government!
An alternative to term deposits is to invest in shares, especially those that have been a good source of ‘yield’ (a financial jargon term for income). Aussie bank shares have been a favourite for yield investors and they have been paying about 5.5%. This will give an income of $55,000. Much better than the term deposit, but there is a catch – No guarantee whatsoever that the income will continue.
There are many other options, such as a balanced portfolio; a mix of shares and fixed interest investment which will pay an income of somewhere between 3 and 5.5%.
You could look to buy an investment property. As of July 2015, the ‘gross yield’ for property is somewhere between 3.3% and 5.9% See the report from Sydney Morning Herald Sydney investment properties are now at 3.3% and currently have a median price of just under one million. Important – A ‘gross yield’ does not take into account the cost of maintaining that property, so your net yield (what you pocket) would be much less.
2 – How can I secure my income for the full term of my retirement?
The full term of your retirement will vary based upon your age at retirement and your eventual passing. But lets assume it is 20 years or more. During this time, it is likely that all investment markets will have their ups and downs. We should all be able to remember the Global Financial Crisis (GFC). This caused share prices to collapse by some 50% and interest rates cut lower by the Reserve Bank to help the economy to stablise and grow. While share prices have mostly recovered, interest rates are now at historic lows.
The challenge for most retirees it to make sure their income grows in line with inflation, this way your million dollars is preserved. If this does not happen, you’ll try and live off a smaller income (in terms of what it will buy) or dip into your million dollars to supplement your income.
To maintain your income and your million dollar investment, you will need to invest in growth assets. Typically, this means shares and property. Investments in shares and property will go up and down in value and this will make for an uncomfortable investment ride during your retirement. To smooth out this ride, you can put some of your million dollars into cash deposits and withdraw the cash when the markets fall. Your cash deposits will act as a buffer and can they be topped up when the investment markets recover.
3 – Will my income needs change during my retirement?
Rarely does anyone, particularly married couples, have the same income need during retirement. Most retirees will spend more in the first few years of retirement, usually on travel. In their later years, the income need usually reduces as it is becomes more difficult to get out and about.
There are many other factors to consider and most will be out of your control. Sickness and the death of one partner will inevitably occur. The need to move into different accommodation may also be required and this will have a major impact on your finances.
Planning for a consistent stream of income during retirement is always planned but rarely is it a viable plan, as your plans will need to change to suit new circumstances.
The key is to have a safety net provision and some growth in your portfolio.
4 – What is the best retirement plan for a one million dollar investment?
The best course of action is to find the right financial planner for you. You can use our popular Find A Financial Planner Guide and Free Checklist. Your financial planner will help you to understand the risks associated with the investments. The financial planner will also help guide you through the maze of tax and age pension benefits which can be critical factors.
The wash up
For most people, one million should be plenty for retirement. It will need some careful planning and expect to have some bumps along your retirement journey. Your retirement circumstances will always change due to health, government legislation and investment markets. The winning formula is to have access to a qualified financial adviser you can trust.