Can you retire without a million dollars in savings? Will you be forced to work forever? Is there a light at the end of the tunnel? Despite what some financial experts suggest, it’s still possible to retire with less and live life on your terms.
Let’s say you retired thirty years ago with assets of $335,000 ($500,000 today) and an annual income of $50,000. At $50,000, your Social Security benefit would have been about $1,230 per month or $14,760 per year.
Investing your $335,000 nest egg in a portfolio of funds, with an asset allocation of 60% stocks, 40% bonds, produced an annual income of $17,139. Combining the Social Security benefit with your investment income generated a total of $31,899 during your first year of retirement, or 64% of your employment income.
Today, thirty years later, what is the value of your portfolio, and how much income is it generating? At the end of last year, your account balance was $949,072, and the annual income from your investment portfolio was $43,736. Your Social Security payout was $22,104. So, your combined income last year was $65,840, an increase of 106% from your retirement income from thirty years ago.
Last year, your investment account was worth $949,072, and it generated an average annual return of 9.46% per year, tripling your original investment despite withdrawing money every year. The total income you received from your portfolio for the past three decades has been $958,122, almost three-times your initial investment!
To summarize, you invested $335,000 and received $958,122 in payouts, and your account balance is now worth $949,072 -staggering numbers.
Here is the portfolio:
- Vanguard Total Bond Market = 40%
- Vanguard 500 Index = 30%
- American Funds Europacific = 15%
- Fidelity Emerging Markets = 5%
- Fidelity Real Estate Investment Portfolio = 5%
- Vanguard Small Cap Index = 5%
If you can’t imagine saving more than a million dollars, fear not, because you can still retire. To help you in your journey, here are a few ideas to improve your golden years.
- Watch your expenses. You can control your spending. If you can lower your costs, you need fewer assets to retire. Before you’re ready to retire, allocate time to review your spending habits and budget. Where is your money going? How is it being spent? Are there items you can eliminate or reduce? A few hours of review may yield substantial savings.
- Invest for growth. A common reaction from retirees is to invest more conservatively once they stop working; this is a mistake. To maintain your lifestyle in your later years, you must own stocks. Stocks will grow over time and keep you ahead of inflation.
- Invade your principal. It’s okay if you invade your principal to meet your living needs. If you need a few extra dollars, don’t worry about dipping into your accounts to withdraw more funds. If your accounts are growing, you may accrue a slush fund for emergencies and opportunities.
- Rebalance your accounts. Annually rebalancing your accounts reduces your risk and maintains your asset allocation. January is an ideal time to rebalance them since most mutual funds pay dividends and capital gains in December. Most investment firms can rebalance your accounts automatically.
- Give to others. You might not feel like a Rockefeller, Vanderbilt, or Carnegie, but giving a few dollars to those less fortunate will go along way. Unfortunately, there always people in need, so your donations will help others.
- Enjoy your retirement. It’s not what you earn; it’s what you keep. You can live within your means during your retirement. It’s your choice. Once you get a handle on your spending and income, you can plan for a joyful and enjoyable retirement.
You only live once, but if you do it right, once is enough. ~ Mae West
January 20, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
Data Sources: YCharts and Morningstar
 Morningstar Hypothetical Tool. January 1, 1991 to December 31, 2020.