What's a million dollars get you?

“A million bucks won’t get you much these days”.

I was taken aback by the comment. 

We tend to use that number to decide who is rich and who isn't.  “Oh, he’s a millionaire, he can afford it”.

Truth be told, most of us will retire with a lot less.  According to the Boston Consulting Group, the proportion of millionaire households in Australia is 1 in 50 (excluding your house).

​But here’s a bloke going in to retirement with a million bucks to invest telling me he expects he’ll have to be quite frugal. Crikey, if that’s true, how will the other 98% get on?

So what does a million dollars actually get you?

That depends.  Let’s start with a few assumptions.

1.       How much income do I need? – Australia’s peak superannuation body, ASFA, has ‘benchmarked’ the annual budget needed to fund a comfortable retirement. For a couple who own their own home, they have come up with $58,364 per year.  Obviously we are all different, but how they have calculated this can be found here. Read it, it’s interesting.

2.       What is a reasonable long-term investment return? – According to the Australian Prudential Regulation Authority (APRA is a Government watchdog) the average return from the largest 200 superannuation funds for the last 10 years was 6.0% per annum.  Now we are talking about retirement here, and pension funds are taxed differently, so I’m going to use 6.5%. The most recent APRA report can be found here, and a summary here. Again, pretty interesting reading.

3.       What about inflation? – Hopefully, we are all going to be retired a really long time, so we need to allow for it. The average rate of inflation for the last 100 years has been 3.2% and for the last 30 years about 2.5%, so that’s what I’m going to use. What that means is that something that cost $100 30 years ago would be close to $210 now.

So, what is the result?

Based on these assumptions, your million dollars will provide $58,364 (in today’s dollars) for around 29 years.  So if you retire at age 60, the capital is gone by age 89.

There is the Age Pension to assist as well, which is currently pegged at 25% of average wages.  Pension age is 65 though and there are qualification criteria. A couple with a $million won’t get much, a single will get nothing.

Other things to consider.

• We've not allowed for other spending – new cars, holidays, and gifts to the grand kids. 
• The aging population and the pressure that this puts on many things that we currently take for granted – health care, pharmaceuticals, residential aged care and social security. More on that here.

So, can you retire successfully on $1 million?

Yes, plenty of people have a comfortable retirement with much less.  But it depends on:

1. How you define retirement, 
2. Your personal inventory of everything in your life: assets, debts, health, kids, parents and 
3. What the future holds. 

Remember, stuff happens in life.  Thirty+ years of unemployment or diminishing employability is a long time.  

What should people do?

In all scenarios, retirees should look to optimise your financial nest egg with effective income and investment strategies. Look at how your investments can grow with the proper risk and tax efficiency, yet still throw off the income desired in retirement.  

Use financial calculators and other tools to help you visualise ‘what if’ scenarios about your financial life.  

Watch what happens to your retirement nest egg when you spend more.  Look at the net effect of something important like downsizing your house, or taking that overseas holiday. See how different tax and investment strategies impact the bottom line.  

If you do nothing else but review your options with a professional, you have a far better chance to live out your golden years in financial comfort.  Just make sure it is the right type of advice – no conflict, fee only and not distorted by ties with big institutions and product providers. 

More on that here.

You may also find these articles useful.

• Can you really afford retirement
• Retirement spending – time to set the bar lower

Disclaimer
The calculations used in the article were made with the ASIC MoneySmart retirement calculator. You can access it here, use your own assumptions and draw your own conclusions.  The content in this article is general information and cannot be relied upon as personal advice. Readers should seek their own professional advice.  The comments on future performance are only a guide and no guarantee is given regarding future investment returns.