How to Retire with $1 Million

One weekend a few years ago my brother-in-law was visiting. We sat on our back deck, sipping iced tea and talking about early retirement. He was 60 at the time, and looking forward to retiring from his engineering company at age 62.

"Yeah, we've made our number," said his wife.

"Your number?" I asked. "What's that?"

"The money you need to retire," she explained. "For us it's $1 million."

"Nice," I said. "Well, good for you. Is that $1 million each, or $1 million together?"

"It's $1 million each," she explained. "That's what the experts say you need to retire."

Wow, I thought, you need $2 million to retire? They did come from Massachusetts, which is an expensive place to live, so maybe their number was higher than average. But still, if they withdraw the typical 4 percent a year, they will be pulling in $80,000 annually.

My first reaction was panic. Where do you get a million dollars so you can retire? But then I got to thinking about it, and I realized that $1 million is really a symbol of the resources you need to produce a $40,000 annual income throughout retirement. If you save $2 million it could produce $80,000 in annual income, which might be more appropriate if there are two of you and you want to live in a high-cost state like Massachusetts.

So how do you get $1 million? You pull together a portfolio of resources that altogether make you a millionaire. Here's how to retire with $1 million:

Social Security. The average monthly Social Security benefit at the beginning of 2012 was $1,230 a month, or $14,760 a year. At a 4 percent return, that's like having $370,000 in your personal portfolio. Right there, that's more than a third of what you need to retire.

A pension. Do you have a pension? If you're entitled to a $20,000-a-year pension, that's the equivalent of having another half million dollars in your portfolio.

An IRA. The average person with an IRA account currently carries a balance of about $70,000. But that includes a lot of young people. The average balance for those nearing retirement is closer to $150,000.

So if you add together a typical Social Security benefit, a modest pension, and an average IRA benefit, you come up with a total of a little over $1 million.

Only you can decide if $1 million--or $40,000 a year--is enough for you to live on in retirement. It probably is, if you live in a low-cost region of the country, no longer have any dependents, and if you're a frugal person with your own home and a paid-off mortgage.

My brother-in-law and his wife did retire, as planned, with their $1 million each. They cobbled this amount together from his pension, their savings, and their IRAs, plus a little extra from selling their family home and moving into a smaller two-bedroom house.

But they had three grandchildren and more on the way, and they wanted to start a college fund for their grandchildren. They also spent more than they'd planned to fixing up their new house. Then they decided they wanted to do some traveling as well. They needed more money. So what did they do?

Go back to work. My brother-in-law found a position teaching a chemistry course at a community college. His wife took a part-time job with a social services agency, helping immigrants adjust to life in the U.S. Together, they supplemented their retirement income by about $20,000 a year--the equivalent of having another half million dollars in the bank.

It's a good idea to have a number in mind when you make plans to retire. The number may seem astronomical at first, but it's easier to get there than you might think at first. However, keep in mind that your retirement number can change, depending on how much you want to be able to spend in retirement.

Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.



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