Is $5.5 Million the Magic Number to Retire Comfortably and Pass Wealth to Your Children?

How much money do you need for retirement?

This commonly asked question reminds me of my mom’s scoffing, “How much cloth do you need to make a suit for an orphan?” she’d ask.

The point is, it’s irrelevant that the suit is for an orphan, but you’ve been given no relevant info, such as the orphan’s measurements.

Here, we have no info on what lifestyle you’d want to live in retirement.

If your desired retirement requires a budget of $50k a year, you’d need far less than if your number is $150k a year.

What Do Affluent Americans Think?

According to a First Citizens Wealth Study, 709 employed people who have already amassed at least $500k were asked, “When you reach retirement age, what amount of money do you feel you will need for the following conditions?”

The three listed conditions were: (1) bare minimum, (2) comfortable retirement, and (3) retire and bequeath wealth to heirs.

• For the first condition, the average reply was $1.5M.
• For the second, the average was $3.0M.
• For the third, the average was $5.5M.

In my opinion, as we’ll see below, it’s especially instructive that the question asks about feelings, rather than calculated numbers.

What Retirement Spending Do These Numbers Allow?

Answering this question requires us to decide on a level of risk we’d be comfortable taking, knowing that failure means falling into poverty in our old age.

Let’s look at three scenarios.

1. You start by drawing a conservative 3 percent of your investment portfolio’s value in Year 1 of your retirement and adjust each subsequent year by the prior year’s inflation rate. The success rate for this method is expected to be higher than 90 percent.
2. You start with a 4-percent draw and adjust each year by the prior year’s inflation rate, which a recent Morningstar report estimated would have a 90 percent chance of success (the gold standard in retirement planning).
3. You start with a 5-percent draw, adjust each year by the prior year’s inflation rate, but then trim spending by 10 percent if the new draw exceeds 6 percent of your remaining portfolio, and bump up spending by 10 percent if the new draw is under 4 percent of your remaining portfolio (known as the Guardrails Approach). This approach also sports an estimated success rate far higher than 90 percent.

If you have $1.5M invested, your initial draw would be $45k for scenario 1, $60k for scenario 2, and $75k for scenario 3. Add in the $32.7k average Social Security benefit for couples and you could budget about $78k for your first year in retirement under the first scenario, $93k under the second, and $108k under the third.

How good are those income levels?

According to DQYDJ.com, these income levels would place you in the following percentiles for age 67:

• $78k is in the 68^th percentile.
• $93k is in the 77^th percentile.
• $108k is in the 83^rd percentile.

How about $3.0M?

Here, the three scenarios, including an average Social Security retirement benefit, would result in retirement income levels of $123k, $153k, and $183k, respectively.

According to the income percentile calculator for age 67:

• $123k is in the 85^th percentile.
• $153k is in the 91^st percentile.
• $183k is in the in the 93^rd percentile.

Finally, what do things look like with a $5.5M portfolio?

Including an average Social Security retirement benefit, the three scenarios would result in retirement income levels of $198k, $253k, and $308k, respectively.

According to the income percentile calculator for age 67:

• $198k is in the 94^th percentile.
• $253k is in the 96^th percentile.
• $308k is in the in the 97^th percentile.

How Much Do You Really Need for a Comfortable Retirement?

The answer is subjective.

Will you be happy living on $86k a year – the 75^th percentile level for 67-year-olds?

How about $135k a year, placing you in the 90^th percentile?

Or are you in the market for a super luxe retirement at $300k, in the 96^th percentile?

Obviously, the higher your number, the less likely you will achieve it, and if you do, it will likely take longer to get there.

However, we’re talking personal finance, so there are no wrong answers. If it’s what you personally want, don’t let anyone tell you it’s too much (or too little)!

Ronald E. Lang, Principal & Chief Investment Officer, Atlas Wealth Management, LLC, offers a useful rule of thumb, “This is a ubiquitous question and most people think about it too late. Here is some dirty math you can use without resorting to robust financial planning software. Multiply the annual income you need by 22. For example, if you need $100k per year, multiply that by 22, getting $2.2M. This rule of thumb assumes 4.5 percent income from dividends and interest without touching the principal. Alternatively, you could have other income sources, e.g., rental property. Your financial plan should be based on earning income without touching the principal, giving you a safety net in case you need higher income than you expected, or if you have unforeseen expenses.”

Rob Duncan, CFP, CIMA, Owner, Global Impact Wealth Management, LLC, elaborates, “I’m not sure there is a magic number. However, I do believe many people tend to anchor onto nice round figures ($1M, $3M, $5M) as targets. Yet, when asked how they settled on their number, very few can articulate how they landed on their figure. Anecdotally, based on over 25 years of experience, most people don’t know how much they can sustainably withdraw from their portfolio. According to the survey, if most people want to retire in their 60s, this means their portfolio (along with Social Security and pensions, if any) will need to provide income for potentially 30 years. During prolonged periods of solid market performance, we often see an increased desire to leave a legacy and pass assets on to the next generation. After times of market distress (e.g., 2001-3, 2007-9, COVID) we see attitude shifts. In these instances, people are much more concerned with outliving assets and providing for their needs as they age. The focus is on ‘how can I avoid becoming a burden?’ rather than ‘how much can I leave them?” Through proper planning and incorporating multiple ‘what if’ scenarios, we can increase a client’s confidence and provide them a game plan to follow when the inevitable storms of life (or markets) come. Insurance for long-term care is also a powerful tool to ensure we can get the care we need as we age while protecting assets, not to mention relationships with children who may otherwise be forced to become caregivers. We see increased coverage of the challenge of caring for aging parents and the strain this puts on the finances and lives of caregivers. The key point, and this has been confirmed by other studies, is that having a desire or a goal is not enough. Taking proactive steps to craft a plan specifically for your situation is an empowering process. Those with plans are much more confident in their future.” 

Zack Swad, President of Swad Wealth Management, LLC, cautions, however, “Most people overestimate their ‘retirement number.’ Unfortunately, this often results in people working longer than needed. If people want to leave a bequest, they would need to either save more or be flexible in cutting their expenses in retirement.”

Does It Make Sense that You’d Need Almost Double to Leave a Bequest?

To me, the answer is a definitive ‘No!’

Sure, I want to leave a large bequest to our three kids. But that doesn’t drive my ‘retirement number.’ As I see it, our retirement number should provide a comfortable retirement.

That means (again, for me) that our spending won’t need to go down once we stop working for money, even if we live past age 100.

Will we spend that much?

Research says that even if we do at first, by the time we get to our 80s and 90s (assuming we do), our spending will likely drop by 10-20 percent. If that happens, we’ll bump our annual charitable giving up further than our initial planned giving.

So, if our retirement income from our portfolio, our rental properties, and our Social Security benefits is enough to provide for all that with no definitive end date, once we pass away the remaining estate will generate a hefty inheritance for our kids (even accounting for significant charitable giving).

All that without needing to increase our retirement number, let alone nearly double it.

Now you see why I found it instructive that the affluent people surveyed were asked what they felt they’d need. Had the question required them to calculate things, I suspect their answers would have changed.

Stephan Shipe, Ph.D., CFA, CFP Owner and Lead Advisor at Scholar Financial Advising, addresses this question, saying, “Many people underestimate the impact and size of their bequest as their need for retirement income increases. If someone is looking to spend $250k in retirement and planning for $5M as their ‘goal number,’ then legacy concerns and preparing children for the inheritance become a concern regardless of whether legacy is the goal. If the withdrawal rate is appropriate, account sizes should be projected to increase throughout retirement rather than drop or stagnate.”

Michael Rosenberg, RFC, CPFA, Founder and Managing Director of Diversified Investment Strategies, offers an alternative approach, “I suggest to my clients a tiered approach to income, taking a higher distribution rate from age 65 through 85, and decreasing income after 85. I also suggest (and each plan is unique) having a life insurance policy or, at least, a second-to-die policy to provide legacy bequests. The life insurance gives retirees a ‘permission slip,’ as I refer to it, to run assets down to zero. If assets do go to zero, the life insurance policy can provide income through policy loans.”

The Bottom Line

It’s impossible to say how much you’ll need to retire in comfort without knowing how much you want to be able to spend in retirement.

As Angela Dorsey, Founder and Financial Planner of Dorsey Wealth Management, says, “The amount needed to retire and leave a bequest has so many variables that it is not wise to get attached to a set number to achieve these goals. Factors like living expenses, whether the home mortgage is paid off, and even if the client has sufficient long-term care insurance, can greatly influence the number needed to retire and the inheritance size. To get a more accurate gauge on how much is needed to retire and leave a bequest, a person must have a personalized financial plan that reflects their comprehensive financial situation.”

Andrew Van Alstyne, Wealth Manager at Fiduciary Financial Advisors, agrees and expands, “Rather than a dollar amount, I think the more important question is what do you want your money to do for you in retirement? Once we answer that question, we can reverse engineer the dollar amount needed to fulfill their needs. If you’re looking to live a more lavish lifestyle in retirement, you’ll need to amass a larger net worth to draw against than if you plan on living more modestly. I also speak to my high-net-worth and ultra-high-net-worth families about setting up a family bank. By doing so, families can begin transferring assets while the senior members are still alive without depleting the family’s cash resources. It can also allow the elder generation to de-risk their investments while receiving a stable return, as younger generations take family loans to establish themselves. However, this is not a route I would recommend a family undertake without speaking to a financial professional first.”

Many planners offer rules of thumb based on multiples of your last working year’s income, say 10-16 times, as a rule of thumb. However, as your income increases, the percentage of your salary replaced by Social Security benefits drops from 90 percent at the lowest income levels to just over 10 percent for the highest incomes.

Next, if you routinely save and invest, e.g., 30 percent of your income, you wouldn’t need a high multiple of your income, but rather a multiple of your last working year’s spending.

Finally, if you’re planning a super luxe retirement, you need to account for far higher taxes than if your plans are more modest.

Regardless of all the above, whatever retirement number you expect to provide for a comfortable retirement that lasts no matter how long you live will provide a nice inheritance to your kids, without increasing your number to account for the bequest angle.

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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.