Jan 04, 2018

How to "Retire" at Any Age

By Min Zhang

We often hear people say, “When I have one million dollars I will retire.” This does not just apply to people in their 50s and 60s, as ‘retire’ really means not having to work for income. No matter how old you are, you might want to spend less time on work and more time focusing on causes we care about like traveling the world, starting a company or simply spending time with your loved ones.

But for most of us, this is an aspirational luxury. The average retirement savings balance of Americans between the ages of 40 and 55 is a meager $14,500, and the approximate amount the average American needs to retire comfortably is $375,000, according to “Rescuing Retirement” by Tony James, President and COO of Blackstone and Teresa Ghilarducci, professor of Economics at The New School for Social Research.

People younger than 40 shouldn’t be complacent about being young and healthy. Better lifestyle and health care is exactly why we must save more and earlier. We have a greater chance of outliving our money and with the likely rising inflation regime in the next 2-3 decades, $1 million will not be worth as much by the time you can take money out of 401(k) accounts.

The Luxury Case

If your assets can generate enough income to support your lifestyle, you might be the target of envy sooner than you think if you are willing to do a little life hacking. You may have to sell your 3-series and just take Lyft Line, Airbnb out your room in a shared apartment when you travel, buy outfits on Tradsey, limit your intake of artisan coffee/ice-cream, and pretend your Blue-Apron cooking is Michelin-rated.

Don’t pout, you can do it! Plenty of families of four live under $30,000 a year in America. Of course, the cost of living is higher in the major cities due largely to housing expenses, but you can probably afford a moderate lifestyle with a $45,000 annual budget.

So this means your $1 million needs to generate at least 4.5% income per year after tax or 6% before tax (incole of $45,000 falls into the 25% tax bracket assuming no other income). Your income needs to be relatively stable so you do not eat into the $1 million. While the markets can be difficult, this level of income is may be achievable with careful investment selection.

Starting with half a million, you will need income of 9% and 12%, respectively, which are much harder to achieve consistently. You may need to reduce living expenses even further. This luxury case is also harder to pull off if you have kids.

The Common Case

To go from the average $14,500 balance in 401(k) to $375,000 at retirement, investors have to save, at least $15,000 annually, for 25 years assuming a zero rate of return. To reach $1 million, a significantly higher saving rate would be needed in addition to achieving consistently high returns, which very few hedge fund managers are able to do.

Hopefully there are other assets like equity in your home or a business that can be converted into income generating asset at retirement. When you begin the withdrawal of social security this can also make a huge difference and can be maximized depending on the age and income of you and your spouse.

If you are around 60 and in good health, you will very likely live to late 80s and 90s. That’s another 20-30 years – as if your life has just begun! At younger ages, it doesn’t hurt to look at other options such as long-term care insurance as it can be much cheaper if you purchase LTC policies earlier. If you want to leave money to your dependents, a universal or whole life insurance can be a tax-efficient vehicle. Be careful though, these products tend to have meaningful fees embedded.

If you are under 40, you should still plan ahead and not rely heavily on the fact that you’re young and healthy. In fact, this is exactly why we must save more and earlier. Better lifestyle and healthcare means we will be more likely to outlive our savings. Rising inflation can mean your $1 million can be worth a lot less by the time you retire in a couple decades.

Unless you are 5-10 years from retirement, your retirement accounts may be able to afford meaningful risk to generate growth, but obviously individual situations differ.

Three Caveats:

  • One: Income-generating portfolios often contain bonds. In general, the bond market is volatile and depending on the issuer and the type of bonds, the after-tax yield can be different than the stated yield.
  • Two: Yields decline as the asset prices go up. To meet the income goals, the income assets may need to be adjusted as their prices change.
  • Three: If you want to “retire” early, do not withdraw from your 401(k) or retirement accounts. You will lose a large percentage of it due to the early withdrawal penalty and pay taxes on the remainder. The income generating assets I talked about need to offer you income that you can access without a withdrawal penalty.

It looks like it’s entirely possible to retire early if you have $1 million. It’s a great life option to exercise: you don’t have to eat into your principal, and you can also go back to work, though you might not be on the same income track. The rest of us will be jealous and saving as hard as we can. So if you take the luxury case, you better be changing the world!

Disclosure: Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained herein is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances.

Min Zhang

Min Zhang

United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.

Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.