CAPITAL IDEAS: Americans expect they’ll need $1.25 million to retire


For most people, an investment portfolio of $1.25 million seems unattainable. And maybe they are right. The primary source of savings for Americans is the company’s 401(k) plan. According to the “How America Saves 2022” report, the average 401(k) balance for those 65 and older is $280,000. Some significant outliers deviate from the mean, so the $87,700 mean may be more significant.

Graph provided by Vanguard report “How America Saves 2022”.

However, the Harris Poll’s “2022 Planning and Progress Study” found that US adults believe they will need $1.25 million to retire comfortably. This finding reminds me of a passage in my book, Never Run Out of Money in Retirement: How to Increase Income, Avoid Taxes, and Keep More of What Is Yours:

Not all that long ago, you might be surprised to learn there was a millionaire just around the corner. The word ‘millionaire’ once conjured up images of toppers and moneybags. Today they’re in jeans and T-shirts, and they’re everywhere. You might very well be yourself, but does that mean That you are ready for life Will you have enough money to see you comfortably for the rest of your days?

You may have heard of the 4 percent rule, which became a rule of thumb in retirement planning in the mid-1990s. It was developed by William Bengen, a California consultant who based the formula on his research on historical market behavior. The rule is that if you spend 4 percent of your portfolio annually, you are unlikely to run out of money for thirty years. The portfolio should be diversified and invested relatively with a mix of stocks and bonds.

Now let’s look at how those numbers would perform if you were to retire with a million-dollar portfolio. Each year, you could withdraw $40,000, adjusting for inflation. Is this the kind of income you were expecting when you pictured yourself as a retired millionaire? Full time for a year for $20 an hour Better than minimum wage, yes, but not that much anymore… Bengen revised its formula in 2006, raising the rate to 4.5 percent.

I do not rule out the achievement of reaching the millionaire threshold. Most people don’t even come close to saving that much. I’m just suggesting that you should evaluate what a million dollars can realistically do for you when you invest in a retirement income stream. Most would-be retirees are looking to have a quarter century or more of comfortable living ahead of them, but comfort is relative. An annual income stream of $40,000 on top of your Social Security checks may be everything you expect and want. It all depends on the standard of living you envision for your retirement. You may not need a million to feel like a million bucks. Or you may need much more than that.

“Some people have come into our office with just one question: ‘Can I retire today? Literally, today. That was their plan, but they thought they had to get confirmation before giving two weeks’ notice and walking into the unknown. Some even know full well they’re in really good shape but want confirmation that’s more emotional than athletic. Either way, to perform. My job, I need to know how they plan to pay the bills and what those bills are. Do they have enough income to cover their needs? How about paying for all their wants and maybe a wish or two?”

Retirees often overestimate their income and underestimate their retirement expenses. As the owner of Berkshire Money Management, one of my first concerns for retirees is whether they can afford health care. According to Fidelity Investments, “The average retired couple by age 65 may need to save approximately $315,000 (after tax) for healthcare expenses in retirement.”

You can find basic information about Medicare at Don’t Run Out of Money in Retirement; However, the process of maximizing Medicare benefits is difficult for many people to navigate. A representative of the Fidelity study notes, “Many people assume that Medicare will cover all of your healthcare costs in retirement, but it doesn’t. So, you should carefully weigh all of your options.”

Getting the most out of Medicare is a specialty in itself. Many people will need more than a website address, a YouTube tutorial, and a copy of “Medicare for Dummies” to get everything they’re due. And then the word “worth” may need to be modified later on to “need”—whether it’s the need to save costs or inflate coverage. Whether you do it yourself, a counselor who handles it, or someone who wrote a book about it, Medicare isn’t likely to cover the bulk of your healthcare costs in retirement.

The point is, even if you make a whopping $1.25 million in retirement savings, you may not retire as comfortably as you expect. No wonder 43 percent of those who participated in the Plan and Progress Study said they did not expect to be financially ready for retirement. That may be why the report found that Americans now plan to work longer, and retire, on average, at age 64, compared with 62.6 last year.

A third of people in the study expect the possibility of running out of money in retirement. However, the report found that only 36 percent of these people proactively dealt with this anxiety. The study finds, “More than six in 10 Americans (62 percent) say their financial planning needs improvement, yet only a third (35 percent) seek help from a financial advisor.” I am amazed that so many people use financial advisors, given the widespread perception that the core value is investment choice, as opposed to other financial planning tools.

The 2022 Planning and Progress Study found that “people experiencing financial uncertainty say it affects their health, job performance, relationships, and more. They report that financial uncertainty leads to the following problems at least once a month:

  • It makes them feel depressed – 36 per cent
  • It keeps them awake at night — 34 percent
  • Affects their relationship with their spouse/partner – 28 percent
  • It causes them to miss out on social events and opportunities – 28 per cent
  • Creates problems with friends or family (other than spouse/partner) – 26 percent
  • “It makes them physically ill — 24 percent
  • “affects their job performance – 24 percent”

There is a cost to avoiding financial planning that exceeds the size of your investment portfolio.

mullet trade

Earnings season has officially begun. Wall Street analysts expect fourth-quarter 2022 earnings for companies in the S&P 500 to fall 4.1% year-over-year, according to FactSet. This is a swing from the 31 percent growth rate in the fourth quarter of 2021.

Note: Q4 2022 earnings growth based on estimates. As of January 6, 2023. Graph courtesy of FactSet.

Those same analysts expect full-year 2023 earnings to rise 4.7 percent in 2023, according to FactSet.

Graph courtesy of FactSet.

If earnings rose 4.7 percent in 2023, the US economy would have avoided a recession. However, I expect inflation to usefully decline (the math backs up my prediction, even if shoppers don’t feel that way). This is a recipe for big gains in the stock market.

It’ll take a year to find out, but if any Capital Ideas readers want to bet on the “over,” I’ll take the “under.” If you’re betting on the S&P 500 earnings coming in at 4.7 percent or more for 2023, I’m betting that it will decline. The loser pays to the winner’s chosen charity.

I may have some coming in because it will be for charity. But I bet the typical reader of “Capital Ideas” knows that this is a corny bet. The Federal Reserve’s hike in interest rates to reduce inflation will make it difficult for companies to increase their profits this year.

I suspect that the stock market has not yet fully digested the corporate earnings trajectory. What I predict for the stock market in 2023 has been best coined by Brent Thill of Jefferies. Thill calls it “Mullet Trade,” a reference to layoffs woes in the technology sector. The tech industry saw more than 97,000 layoffs in 2022, according to Challenger and Gray & Christmas.

While this was the second lowest number of layoffs on record since it was tracked in 1993, it topped all other sectors. Till explained, “We believe in the mullet business…where it’s kind of the business in the front, and the party in the back…the front half is going to be a lot of a pain.” [I would] Use it as an opportunity to buy into the pain [before reaching] A flowing, long and exciting walk” in the back half of the year.

It’s a nice visual representation of what could happen to the US stock market (particularly technology stocks) in 2023. Mullet Trade may see stock prices drop or go sideways as companies appropriately size hiring levels and scale back expansion projects. They will likely find a bottom around the second or third quarter, bottoming out into a long and painful bear market.

Allen Harris is the owner of Berkshire Money Management in Dalton, Massachusetts, where he manages more than $700 million in investments. Unless specifically identified as original research or data collection, some or all of said data is attributable to external sources. Unless otherwise stated, any mention of specific securities or investments is for illustrative purposes only. Clients of advisors may or may not hold the discussed securities in their investment portfolios. The advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at [email protected]