Retire Early With $1M? (Pt. 1)

Submitted by Jeff Rose on Tuesday, December 30, 2014 - 3:00pm
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Retire early with seven figures socked away? A million bucks isn’t what it used to be to live a lengthier-than-normal stretch of golden years. Here are some tips to better your odds.

As a recent article from USA Today claims, “[Ten] to 12 years ago, when people earned a lot more on their investments, $1 million could generate $70,000 to $80,000 a year in retirement income. But with interest rates as low as they are, that’s [no longer] really feasible.”

Sure, you can make the most of your short-term investments such as online savings or checking accounts or a Roth individual retirement account; intriguing options like peer-to-peer lending can yield decent returns. Such avenues still fall short of guaranteeing a comfortable early retirement.

A recent client put me to the $1 million early retirement test. He’s 56, and his wife is 57. Before he came to the appointment, I knew that he had roughly $1 million – not nearly enough for somebody still more than six years from collecting his first Social Security check.

I wasn’t optimistic about giving this couple a green light to retire early. But after we went through what our firm calls a Financial Success Blueprint planning process, I determined that this couple had a 92% probability of successfully retiring early.

I’m uncomfortable with my clients retiring early. What made this couple able to retire at 56 with $1 million and a 92% chance of success? The odds of their good future started with a look at where they are now.

Retirement goals. For the first three years of early retirement, this couple needed to pay out of pocket for medical insurance. We estimated that they required $70,000 for insurance and income.

After the first four years, we planned that they could live off an initial amount of some $48,000 a year that we increased 3% each year for inflation. I tell all my clients that the 3% factored in for inflation never goes away, meaning that the plan for when clients are in their mid-80s assumes spending $80,000 a year.

(Actually, few clients spend that amount; we usually plan for such costly issues as long-term care and medical costs with Medicare and long-term care insurance.)

Lifestyle goals. This couple likes to travel and already planned a few adventures for the first years of retirement. They also plan to buy a new car, a motor home, a cabin and some 4-wheelers and of course will also shoulder the additional cost of travel. We factored in all of these to make the plan as realistic as possible.

Assets and liabilities. Most of the couple’s assets were in a pension plan that likely allowed them to take a lump-sum distribution to roll right into an IRA. They also had a 401(k) worth roughly $250,000 and owned two triplex residences. They held some equity in the properties but didn’t expect the real estate to generate cash flow for another nine years.

The husband’s consulting had also produced an investment account worth roughly $120,000.

Income. The biggest factor allowing this couple to retire early: additional income. My client was an expert, valued by his employer; with that came opportunities to consult for both his and other companies that netted him approximately $30,000 per year.

He’s confident he can continue this work for at least four, if not six, more years, which gets him to retirement. He also believes the gig will allow him to travel with his family and work on his own terms.

Investment strategy. Based on his risk score, we allocated the client’s portfolio for half stocks and half bonds – generally a good starting point for any retiree. Using historical returns from our planning software, we set the allocation to include 35.75% domestic equities and 14.25% international equities, with the rest split among international fixed- income bonds.

(Our next article examines how we apply these factors to get the highest chance of success taking into account market swings and shortfalls, and what you can do to increase your own chances of retiring early.)

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Jeff Rose, CFP, is the founder of Alliance Wealth Management in Carbondale, Ill., and also is the founder of the website Good Financial Cents and Life Insurance by Jeff.

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