Can you retire on 10 million dollars? 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 dollar retirement lifestyle
Assume a married couple (the Morgan’s) 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 the same 60/40 portfolio using the 2022 J.P. Morgan Long-term Capital Market Assumptions is 3.6% and 10.4% respectively. In another words, the economists at J.P. Morgan expect returns over the next 10-15 years to be almost 4.5% lower per year, on average, compared to the past 15 years.
As you might imagine, the difference is significant. If we adjust the Morgan’s analysis using the risk and return figures above during the first 10 years and the historical numbers thereafter, the probability of success (e.g. not running out of money) drops from 82% to 43% without changing withdrawals. Getting to a probability of success of at least 80% requires spending $130,000 less per year in this hypothetical situation.
To be clear: no one has a crystal ball. The markets will ultimately dictate what happens over the next 10-15 years…anything else is just an educated guess. But before making any major financial decision, it’s prudent to consider a range of possible eventualities.
Other factors to consider in retirement planning
Taxes
Taxes change outcomes. There are so many variables here, taxes were omitted from the previous examples. But in reality, whether you can retire on $10 million or any other amount will depend on factors such as state of residency, asset mix (e.g. retirement, brokerage), basis in taxable assets, future changes in tax law, etc.
Risk tolerance and asset allocation
A conventional 60/40 portfolio was used in these examples for simplicity as many investors are familiar. However, a diversified portfolio typically includes multiple asset classes, geographies, sectors, and other characteristics.
Importantly, your retirement portfolio will look different. Many factors go into determining the right asset mix and risk profile. For example, if you have a sizable income stream outside of your portfolio (e.g. deferred compensation payouts, rental income, installment sale), that may affect how you approach investment risk.
Adding flexibility
Having mostly fixed costs can be a retirement planning challenge as it requires a high probability of success. In contrast, when retirees can adjust spending if needed, it can help make retirement goals more attainable. Spending drives so much of what’s possible.
Flexibility is important in retirement as there are so many things that can happen over the years. The fictitious Morgan’s drop dead right at age 90 in the simulation. In real life, longevity doesn’t work that way.
Inflation is another example. The Minneapolis Federal Reserve expects the annual inflation rate will be 4.8% in 2021, up from 1.2% in 2020 and 1.8% in 2019. That’s more than double the inflation rate over the last 25 years.
At any asset level, it’s important that your retirement plan is reflective of your financial situation and has flexibility to adjust as situations warrant.
Disclosures
Examples in this article are strictly hypothetical and for illustration purposes only. Past performance is not indicative of future results. This is a general communication for informational and educational purposes only. This article is not personal advice or a recommendation for any specific investment product, strategy, or financial decision. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. If you have questions about your personal financial situation, consider speaking with a financial advisor.