High earners often need significant assets to maintain their lifestyle in retirement. This fictional … [+]
Can you retire on $10 million? For many Americans, this hefty sum would far exceed retirement needs and may even lead to generational wealth. However, individuals with high incomes often require a larger portfolio to maintain their lifestyle in retirement. Or if you’re expecting sudden wealth from stock options or selling a business, you may be wondering if you can retire early on the windfall.
The following hypothetical situation illustrates the lifestyle a $10M portfolio may be able to support in retirement for a 50-year-old couple and, most importantly, how different variables and assumptions significantly affect the outcome.
Is $10 million enough to retire?
It depends primarily on your annual income needs, age, and key assumptions, like rate of return. There are other considerations, but these are the key drivers. As the cost of maintaining your desired lifestyle in retirement increases, so will the assets required to support it. Popular rules of thumb like the 4% rule inherently don’t consider an individual’s personal circumstances and the actual impact on outcomes.
$10 million retirement lifestyle
Assume a married couple (the Morgans) wants to retire at age 50 with $10M portfolio. For simplicity, we’ll assume their asset allocation is a 60/40 mix of US stocks and bonds. The illustration uses the weighted annualized return and volatility figures between 2007-2021 to estimate portfolio growth and risk (8% and 11.5%, respectively).¹ Inflation is 2.2% (the 25-year average) and their life expectancy is age 90. All tax implications have intentionally been excluded from the analysis.
Running a Monte Carlo simulation with a success rate of at least 80%, we can back into the Morgan’s maximum annual ‘safe’ withdrawal rate: $475,000.²
Again, the purpose of this article isn’t to debate whether this hypothetical portfolio or annual income stream is/should be enough in retirement. Instead, the focus is on the underlying assumptions and how differences in an investor’s personal financial situation can drastically affect the outcome.
Assumptions drive outcomes
Past performance is not indicative of future results. This is perhaps the most common verbiage in disclosure language for asset managers (please refer to the end of this article for more important disclosures!). However, many investors focus too heavily on the past (and often-antiquated investing ideals) when envisioning the future.
And failing to account for probable future outcomes when making a major financial decision can significantly distort results. Due to sequence risk, individuals often face the greatest investment risk in the beginning of retirement compared to the long-term.
Risk and return
There are many factors that drive market outcomes. History is a helpful guide but it’s not the most reliable indicator of the future.
To illustrate, the average annual return and volatility assumptions for …….