5 Costly Mistakes Seniors With a $1,000,000+ Portfolio Need to Avoid
Key Points:
- $1m portfolios may not be enough in retirement if you make one of these five costly mistakes
- Strategic withdrawals, retirement income, asset allocation, and capital gains taxes are important factors in making your wealth last
- Set up a free 1:1 with a financial advisor to confirm if you’re ahead, or behind on retirement
According to research from Smart Asset, the median savings for someone in their 60’s in $185,000. If you’ve made it that far and have $1,000,000 or more, take a moment and appreciate what an achievement that is.
But many Americans just like you have made it here without a game plan for what happens next. You might be wondering whether that’s enough to actually retire, and if not how much more you’ll need to save. And once you hit ‘the magic number’, how do you responsibly manage what you’ve earned to make sure it lasts?
The good news is $1m can be enough to retire, but only if you avoid these 5 costly (and all too common) mistakes that millions of retirees make.
1. Failing To Assess Retirement Income
Before you retire you must understand what your annual income (spending) needs are. This number is perhaps more important than your nest egg itself, because it tells you how much you need to have saved, and how long it will last.
On average, retirees need 70-80% of their pre-retirement income to maintain their lifestyle. So if you’re used to living on $100,000 a year, you should budget for $75,000 – $80,000 a year in withdrawals from your nest egg. As seniors well know with inflation running hot the last few years, it’s better to be a little conservative here and err on the high end.
That’s a good start but still doesn’t get you all the way there.
Remember that you’ll need this income for anywhere from 20-30 years. It’s not as straight forward as just multiplying the annual income by 20 or 30 though, because you’ll have to account for assumed investment returns and inflation. To strike the right balance here and assessing your retirement income needs accurately you can take this quick quiz (it’s free) and assess your current saving and spending levels.
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2. Forgetting To Maximize Other Income
While a $1m nest egg is meaningful, it may not be sufficient for a rich retirement. The good news is, supplementing this with additional income from Social Security or other sources can dramatically extend the life of your savings.
For some simple math based on the 4% safe withdrawal rate, every $10,000 in extra income you can generate is $250,000 less you need to have saved for a rich retirement. Even modest income from a part time job can easily hit this level, or higher. And then there is Social Security.
While you can start receiving Social Security payments as early as 62 years old, waiting a few years (even pushing as far as 70) often significantly increases your monthly payments. If you have the ability to earn extra income from rental properties, side gigs, or other part time work this can also extend your runway for that $1M portfolio. It’s not unusual to see retirees pick up an extra $20,000 – $30,000 a year with fulfilling part time work.
But this extra income is only effective if you consider your overall portfolio withdrawal rate at the same time. This is a simple, but profoundly important step that a financial advisor can help you with. Among other things, they can help you determine whether 62, 65, or 70 is the best age for you to claim Social Security in retirement. Click here to take a brief quiz and get started.
3. Neglecting Strategic Withdrawal Plans
How you spend your money is as important as how you save it. ‘The 4% rule’ has gained popularity in recent decades as a reliable rule of thumb. It states that, on average, you should be able to spend 4% of your portfolio per year and have the money last through retirement.
For a $1,000,000 portfolio that means spending $40,000 per year. That certainly doesn’t seem like much, but when augmenting with income from step 2 above, that $40,000 can more increase to a much more significant $60,000-$70,000 per year when combined with some additional income from Social Security and you see how a 4% withdrawal rate can go much further than simply relying on that portfolio income alone.
But the math is more complicated than that. If you are retiring early, you may need a lower safe withdrawal rate to account for a wider range of investment returns across your lifetime. Spending above this level could risk your retirement entirely, exhausting your savings at exactly the wrong time.
On the other hand, if you have meaningful extra income or are more advanced in age you can tolerate a higher safe withdrawal rate. Simply adopting the 4% rule could mean living too miserly and not enjoying your retirement fully.
We recommend taking this brief quiz and speaking with a professional to determine wether 3%, 4%, or 5%+ is the right number for your situation. It only takes a moment and is completely free.
4. Being Too Proud To Meet With A Professional
You wouldn’t have your barber conduct surgery, or have your banker make major repairs to your home. But that’s precisely the mistake people make when they are too proud to meet with a professional money manager, thinking they can go at it alone. There is so much to consider from life expectancy and risk tolerance, to inheritance and taxes, not to mention budgeting for the vacations you’ve worked so hard to finally take. The most important step in a $1m retirement blueprint is to put all of these factors on the table next to each other and make decisions with everything considered.
You can take a quick quiz to be matched with a financial advisor serving your area who can speak to all of these factors, and more.
An advisor can tell you if you’re on track, or behind on your savings. They will give you the guidance on how much more to save, and help you calculate ‘the magic number’. They’ll answer important questions like determining the best age to withdraw social security, because everyone’s situation is unique.
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5. Manage Capital Gains Taxes
For many seniors with a lifetime of hard work behind them, retirement should be a time of financial freedom and peace of mind. With over a million dollars in investments the assumption is often that these assets are simply a source of tax-free income. However, this is a dangerous misconception. The reality is that the IRS does not provide age-based exemptions for capital gains. Every time you sell an asset that has appreciated in value, you could be incurring a substantial tax liability that can quickly erode your nest egg, turning a planned-for windfall into an unexpected financial setback.
The risks are compounded by a common but costly mistake: selling assets without meticulously tracking their original cost basis. It’s easy to lose track of what you originally paid for an investment, especially one you’ve held for decades. What’s worse, tax law changes from one year to the next. Selling the wrong asset at the wrong time can result in tens of thousands of dollars in unnecessary taxes, or more. Sometimes it actually makes sense to sell more today knowing that next year will have a change in policy.
It’s enough to make your head spin, but fortunately this is exactly the type of math that a fiduciary financial advisor specializes in. You can take this quick quiz to get matched with one today who can answer all of these questions, and more. Don’t pay any more in taxes than you need to and jeopardize your retirement because of an easily avoided mistake.
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