Retirement Planning

If you search for retirement advice online, you’ll often find that $1,000,000 seems to be a recurring target number. But is that a goal you should be saving for, or is it outdated advice?

Q: Where did the $1 million retirement benchmark come from?

A: Historically, $1 million became the goal when it was popularized alongside the 4% Rule in what is known as the Trinity Study, nicknamed based on the university it came from. This study, published in 1998 and titled Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable, suggests that if you withdraw 4% of your portfolio annually, your money should last 30 years. On a $1 million portfolio, that equates to $40,000 a year. Decades ago, $40,000 provided a high standard of living. Today, after accounting for inflation, that same $40,000 doesn’t go nearly as far, yet the $1 million benchmark persists.

Q: Is $1 million enough to retire on today?

A: Maybe. But your retirement needs and how much you’ll need to save are influenced by many factors, like:

• Your desired lifestyle and location
• Retirement age
• Healthcare costs
• Debt obligations
• Investment income
• Taxes
• Longevity
• Inflation

A person retiring at 67 with modest spending and low debt may live comfortably on far less than someone retiring early with high expenses and extensive travel plans.

That’s why focusing on a single number can be misleading.

Q: What role do assets—both liquid and illiquid—play in this equation?

A: Net worth and retirement readiness are not the same thing. You might have $1.5 million in total assets, but if $800,000 of that is tied up in your primary residence (an illiquid asset), you can’t use it to pay for groceries or healthcare without selling the home or taking a loan.

A holistic strategy balances liquid assets (cash, brokerage accounts, IRAs) for immediate needs with illiquid assets (real estate, business interests) that provide long-term stability. You need a plan for converting those assets into cash flow when the time comes.

Q: Does my Social Security timing and tax situation affect the goal?

A: Absolutely. Social Security is a massive liquid component of your strategy, and the timing is important. For instance, the difference between claiming at 62 and at 70 could significantly affect your income plan. Claiming at 62 permanently decreases your Social Security benefit by 30%. But if you wait until age 70, you could receive 124% of your retirement benefit. Having a high reliable source of income, like from Social Security or annuities, means your savings benchmark could potentially be lower.

Furthermore, taxes are often an overlooked expense in retirement. Retirement income can come from taxable, tax-deferred, and tax-free sources. If your $1 million is in a Traditional IRA, you still owe the federal government a good portion of it. If it’s in a Roth IRA, it’s all yours. It’s important to look at net-of-tax income, not just gross account balances.

Your retirement nest egg may also be spread across several kinds of investment tools, so it’s important to consider the order in which you withdraw funds as well. Where you withdraw your income can affect:

• Your tax bracket
• Medicare premiums
• Social Security taxation, and
• Long-term portfolio sustainability

Q: What about risks like inflation and healthcare?

A: This is where a simple number or benchmark falls short. A static $1 million portfolio doesn’t account for longevity risk (living longer than your money lasts), inflation risk (the rising cost of goods), or healthcare risk. People are living longer than ever thanks to modern medicine, but that may mean you need your money to last longer than you originally planned for. Healthcare and long-term care costs can also be substantial. The average cost of a senior care facility can range from $3,000 to $10,000 per month, depending on the level of care provided, and if not planned for, these costs could quickly deplete a retirement portfolio. It’s important to make sure your retirement strategy includes specific contingencies for these variables, whether through insurance, health savings accounts (HSAs), or dedicated emergency savings.

So, how much do I need to save for retirement?

The Real Answer: You’re asking the wrong question.

The question shouldn’t be, “Do I need $1 million?” or “How much do I need to save?” The real question is, “Do I have a holistic strategy to support my lifetime cash flow needs?”

Retirement readiness isn’t about hitting a target number in your bank account. Instead, your retirement plan should be a comprehensive framework that coordinates:

• Social Security Optimization: Choosing the right time to claim to maximize your guaranteed floor.
• Asset Location: Understanding the difference between your liquid savings and illiquid equity.
• Tax Efficiency: Seeking to reduce the taxes on your withdrawals.
• Risk Coverage: Protecting yourself against retirement risks like longevity, inflation, and healthcare.
• Emergency Reserves: Ensuring a market downturn doesn’t force you to sell assets at a loss.

Retirement planning is not just about asset accumulation. It’s about building a plan that helps you live confidently through every stage of retirement. If you find yourself worrying about whether you have enough, it’s time for a second opinion. We can help you coordinate your Social Security timing, optimize your tax strategy, and help you protect your assets from inflation so you can spend your time pursuing your goals in your retirement.

Sources:

https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf

https://www.nerdwallet.com/retirement/learn/social-security-62-vs-67-vs-70

https://health.usnews.com/best-senior-living/articles/types-and-costs-long-term-care-facilities

The source(s) used to prepare this material is/are believed to be true, accurate and reliable, but is/are not guaranteed. This content is provided for informational purposes only and should not be viewed as personalized investment, tax, or legal advice.

All investing involves risk, including the potential loss of principal. The “4% Rule” is a historical benchmark and not a guarantee of future portfolio longevity. Actual withdrawal rates should be based on individual risk tolerance, market conditions, and investment performance; market volatility or a sequence of bad returns can significantly impact the sustainability of any withdrawal strategy.

Any guarantees mentioned are backed solely by the financial strength and claims-paying ability of the issuing insurance company. We are not affiliated with or endorsed by the Social Security Administration or any government agency. Past performance is not indicative of future results.

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When you think about retirement income, Social Security might be the first thing that comes to mind. But many pre-retirees are realizing that Social Security was never designed to replace a full salary. In fact, it typically replaces only about 40% of pre-retirement earnings. To bridge that income gap, many who are considering annuities hesitate to follow through because of misconceptions about them.

Some concepts are often so culturally ingrained that we stop questioning if they are actually true, and annuities sometimes fall into that category. If you’ve heard they are too expensive, too complex, or that your money disappears when you die, it’s time to understand the facts.

Myth #1: “Annuities Are Only for People Already Retired”

The Reality: Annuities can be a powerful tool for savers, not just spenders. While immediate income annuities are known for providing a potential income stream in retirement, deferred annuities are designed for the accumulation phase. If you have already maxed out your 401(k) or IRA contributions for the year, a deferred annuity offers an additional vehicle for tax-deferred growth with generally no annual IRS contribution limits. By starting early, you can help your earnings compound over time before eventually converting them into an income stream when you decide to retire.

Myth #2: “Annuities Are Too Expensive and Too Complex”

The Reality: Annuities are only as complicated as you make them, and you pay for the protection you choose. The high-fee reputation often comes from complex products with multiple riders and additional benefits. However, many modern annuities have simple structures and are low-cost with nominal annual fees.

When evaluating costs, it can be helpful to compare the fee against the value of the risk you are offloading. Are you paying for market protection? A contractually required death benefit? Lifetime income that you can’t outlive? In many cases, these fees are intended to be competitive with other managed investment accounts that don’t offer the same benefits. In short, you get what you pay for.

Myth #3: “If I Die Early, the Insurance Company Keeps My Money”

The Reality: Your beneficiaries can be protected. A common concern regarding annuities is the potential for the total payments received to be less than the initial investment if the owner’s lifespan is shorter than anticipated. However, it is important to consider how different payout options and riders can mitigate this risk. While a “life-only” payout stops when you pass away, many modern annuity contracts can offer options like “period certain” or “joint and survivor” payouts. If you pass away prematurely, these are designed to deliver payments to your spouse or beneficiaries for a set number of years or for the rest of their lives. So, in addition to providing a stream of income while you’re alive, annuities can help protect your legacy.

Myth #4: “You’re Better Off Investing in the Market”

The Reality: Annuities and market investments serve different purposes. Investing in the stock market can be risky as you approach your full retirement age because while the market can offer potential for growth, it doesn’t offer a floor. Fixed annuities can help provide a hedge against market volatility by providing an income baseline that tends to fluctuate less if the market dips.

Like Social Security, think of an annuity not as a replacement for your portfolio but as one of the pillars of a comprehensive retirement plan. By covering your essential expenses like housing, food, and healthcare with consistent income from an annuity and Social Security, you can build a foundation of financial independence that helps provide the flexibility to invest other assets for long-term growth.

Myth #5: “My Money is Locked Up with an Annuity”

The Reality: Liquidity concerns with annuities are common, but liquidity and flexibility are built into many contracts. While annuities do have “surrender periods” (a set number of years you must wait to withdraw the full amount without penalty), many contracts are not entirely illiquid. Some allow you to withdraw up to 10% of the account value each year penalty-free. Once the surrender period ends, you have full access to your contract value.

Understanding Your Unique Situation

Just as a Social Security strategy depends on your unique birth year and goals, an annuity strategy depends on your specific income gap. In our current economic environment, an annuity can help provide clarity and help reduce the stress of market watching.

Ready to see if an annuity fits into your personalized retirement plan? Don’t allow fear or outdated myths to limit your options in retirement. Scheduling an appointment with our team could help strengthen your retirement strategy, so call us today.

Sources:

https://www.retireguide.com/annuities/myths/

https://www.investopedia.com/articles/retirement/08/annuity-mutualfund.asp

https://www.annuity.org/annuities/

https://www.annuity.org/annuities/common-mistakes/

Add disclosure- This information is provided as general information and is not intended to be specific financial guidance. The source(s) used to prepare this material is/are believed to be true, accurate and reliable, but is/are not guaranteed. Annuities are designed to meet long-term needs for retirement income. They provide guarantees of principal and credited interest, subject to surrender charges, and a death benefit for beneficiaries. This information is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not intended to provide specific legal or tax advice and cannot be used to avoid penalties or to promote, market, or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney. Although external indexes may affect contract values, the contract does not directly participate in any stock, bond, or investments. You are not buying any bonds, shares of stocks, or shares of an index. This presentation is not endorsed or approved by the Social Security Office or any other Government Agency. Withdrawals are subject to ordinary income tax and, if taken before age 59 1/2, a 10% federal penalty. Withdrawals will reduce the contract value and other benefits under the contract. SWG 5430433-0426

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