A Retirement Fund Of One Million Dollars – Do You Really Need It?

A Retirement Fund Of One Million Dollars – Do You Really Need It?

How many times have you heard someone saying that they would retire immediately if they had a million dollars? For several reasons, a million dollars is a milestone that is associated with financial independence. With financially deflating increases in the cost of living, a million dollars for retirement would soon be reality more than a myth. However, in today’s terms, one can still enjoy a comfortable retirement without a million dollars in cash.

It is necessary to have enough money working for you or a wealth-generating system working for you if you decide to stop working. If one looks at the principle of money at work, one million doesn’t seem like much. Since you shouldn’t wish to spend it all, it would only amount to a little over $8,000.00 per month, assuming an effective interest rate of 10% per annum. If you spend from the principal, then there’d be even less income generated on a monthly basis. If you are planning to retire in twenty years, a target of one million may certainly be necessary. However, in present terms a million dollars is not necessarily a prerequisite for a comfortable retirement.

How you manage the resources you have may ultimately be more important than the actual resources that you have. Should you have next to nothing to work with; this would hardly apply to you. What matters most for retirees is their liquidity ratio and whether it is likely to increase or decrease. Most retirees would have accrued assets over time. For retirees who are homeowners and have other wealth-generating assets like stocks and bonds, a million dollars in cash would more than likely be superfluous. There are some cases where persons on the verge of retirement seek to acquire their first home. In this case, their liquidity is likely to decrease significantly. This makes it imperative that such persons have a larger retirement fund.

If your financial plan is in disarray at retirement, or any other stage of your life for that matter, one million in cash may not even be enough for you. Medical expenses and other unforeseen events can erase large sums of money quickly. If you do not have sufficient protection products, then a million dollars may be barely enough to insure yourself against risk. Should one find oneself transferred from the fortunate many to the unfortunate few, one’s retirement fund would be severely depleted, whatever the amount. With adequate financial protection, the million-dollar retirement fund would be more of a myth or luxury.

For people low on discipline or lacking financial savvy, any amount of money would disappear quickly. A surprising number of people do not fully appreciate the concept of money working for you. For someone who earns $200,000.00 a year before retirement, a million-dollar retirement fund with no other income-stream could possibly experience a drop in their standard of living with a million-dollar retirement fund. This would be because of the money-at-work concept again. Those who receive a lumpsum upon retirement should remember that the money would be easily depleted if it is not regarded as principal to be invested.

At retirement, there should be two sources of cash for the retiree; an accumulated fund and an income stream. If your income stream upon retirement is already 80% of your pre-retirement income, then there’s less pressure on you to have a large accumulated fund. There’s an inverse relationship between the two. If you have an insignificant retirement fund, then you need to have a higher income stream to build one. Ideally, the retiree should have a balance between the two, adequate health insurance and no intention to increase debt or acquire too many depreciating assets after retirement. In such a situation, one can comfortably say that a million-dollar retirement fund is merely a luxury.

Darrell Victor is a financial services sales professional who specialises in retirement planning and group benefits.