People often meet with their retirement advisors and try to figure out what the appropriate net worth figure is necessary for someone to retire. It’s a difficult question to answer because everyone spends differently to maintain their lifestyle. In addition, adverse health-care developments can dramatically alter plans. Finally, financial advisors don’t want to tell clients in their 50s and 60s that they cannot retire anytime soon because being Dr. Toughlove might be in a client’s best interest but it is not particularly conducive to getting assets under management.
The point being, there are a lot of forces that militate against specific discussion of the appropriate retirement figure.
In spite of this, I’ll share my view. Based upon my reading of the academic whitepaper “Who Is At The Top? Wealth Mobility Over The Life Cycle”, I have come to the conclusion that a fully satisfactory retirement occurs when a household has $1.4 million in wealth, the house is paid off, and the person contemplating retirement is 65 so Medicare applies.
The significance of the $1.4 million price point is that the statistical tipping point between depletion and growth over the course of a withdrawal period. Most discussions about retirement planning focus on the highest withdrawal rate mixed with the lowest probability of the account being drawn down to $0 during the retiree’s lifetime. That type of thinking sets up a terrible race in which your assets being depleted are being measured against the fact that you are still alive and then it is just a question of whether your death date will occur before there are no funds leftover.
For those who reach a net worth of $1.4 million or more, the retiree is pulling in $50,000 plus social security and perhaps other sources of income such as a pension or perhaps de minimis part-time work. At that point, we are looking at $4,000-$5,500 in monthly income without a mortgage payment.
With that kind of spending level and principal devoted to productive assets, one’s net worth can still be climbing $50,000-$75,000 even while the income is being spent. That is the point where the paradigm shifts because real money is being spent yet the net worth is simultaneously increasing.
From a compounding perspective, time is either your friend or your enemy. If you are capable of building a net worth of $400,000-$850,000 over a lifetime, you are in a tricky position because you are capable of building assets but you are seeing them dissipate–time is no longer your friend in the sense that the passage of time drives you towards a point where you could be alive with $0.
The magic mark, therefore, is the point at which time benefits your wealth, including withdrawals, rather than depletes. I would argue this point is somewhere around the $1.4 million mark in the United States, assuming a functional equivalent of having a house paid off. To the extent that your annual spending would deviate from what the median American earns in a year, you should adjust upward or downward accordingly.