What will $1.7 Million Do For You In Retirement?

A news article flashed up on my screen yesterday from bloomberg.com. The headline read: 

BMO Annual Retirement Study: Canadians Believe They Need $1.7M to Retire

It got me curious as to what do people think $1.7 Million means to them as far as a retirement income is concerned. In other words, the real question that needs to be answered is: 

How much Income will $1.7 Million generate for me for the rest of my life? 

There's a few ways to answer that but the ultimate answer depends upon how well you have planned for your retirement. Let's look at two ways someone could create a lifetime income from $1.7 Million. Here are two Simple and broadly accepted methods of ways you can create a lifetime income from $1.7M:

1. The 4% rule - Each year, withdraw and spend 4% per year of your initial investment value. This method predicts that with all the ups and downs of the market that you will have enough money to last you through retirement. 4% of $1.7M equals $68,000 per year of income. There is no guarantee that this method will work as market crashes are not predictable and could erode your wealth very quickly forcing you to run out of money.
2. Life Annuity - For a retiree to be absolutely sure they won’t run out of money, you could exchange your investment for a guaranteed lifetime income (an annuity). If a 65 year old were to buy a life annuity today with $1.7 million, that would provide an income of about $100,000 per year. The down side to an annuity is that there is no estate value as the income stops when you stop living. You can customize annuities to add some guarantees but that negatively changes the income that you receive. 

There are pros and cons to these two methods but both are designed to provide lifetime income. The interesting fact is that most people that think that $1.7 Million is enough probably don't know what that $1.7M will equate to as an income in retirement. As shown above, these two accepted methods can produce drastically different income amounts ($68,000 vs $100,000). 

When we plan and build retirement income plans for people, we always start with the end in mind. In other words, we start by designing for the income that is going to match your retirement lifestyle. We also want to build in important features like your estate plan and if you want to leave money to the people and/or causes that are important to you. We have also found that when you build a plan that encompasses everything that you want to have happen that you do not need as much money as you may have thought you might need. There are many moving parts in a retirement plan and you really need to run your numbers through multiple simulations to find out if you are on track.  

Before you react positively or negatively to a headline like that above, talk to your advisor to see if you are financially on track for what you want to accomplish in retirement. You won't know until you crash test your financial situation within a comprehensive financial simulation. Doing so will give you peace of mind as it relates to your retirement income goals.