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The $2 Million Dollar Retirement Question - Part II

Friday, 8 May 2009 | 11:38 AM ET

Question: Will a $2 million IRA portfolio bring in a healthy monthly interest income 20 years from now? -Jennifer, NY

Answer: This is a continuation from my last blog post (Read Part I here). We assumed that a $2 million portfolio (in the year 2029) invested in CDs or government bonds may generate 4 to 5 percent annually or $80,000 to $100,000 per year in interest income. We also assumed that a diversified portfolio of stocks and bonds may average an 8 to 10 percent rate of return or $160,000 to $200,000 per year in growth.

So, will this be enough to live the lifestyle you’re planning for? It appears you’d be in the ballpark. But it really depends on how much money you’ll need to live on and what the cost of living will be at that time.

For example, let’s say your annual income today is $75,000. Furthermore, let’s assume inflation continues to increase at a 3 percent annual rate and you wish to maintain the same standard of living in 2029 as you do today. With these assumptions, it would cost you approximately $135,000 per year (in 2029) to maintain the standard of living you have today.

At first blush, it appears that your two million IRA portfolio, assuming it generated at least 7 percent or $140,000, would be sufficient enough for you to live the lifestyle you’re planning for. However, you’re planning on living longer than until 2029 right? What if you live another 20 years after that until 2049? Using the same assumptions of 3 percent inflation and $75,000 in today’s dollars, you’d need the equivalent of $182,000 in income by 2039 and $211,000 by 2044. Still in the ball park (but NOT guaranteed).

Bill’s Bottom Line: We cannot predict the future with any certainty. Consequently, you are advised to control what you can control. Max out your retirement plans. Invest at least 40 percent of your money in stocks to try to outpace inflation. Utilize low-cost index funds and enhanced index funds by companies such as Vanguard and SEI. Stay out of debt. Live within your means. Meet with a qualified financial advisor at least annually. Consider working longer.

Bill Losey, CFP®, CSA, America's Retirement Strategist®, is the resident retirement planning expert for On the Money. He has been named one of America’s Top Financial Planners and is the author of Retire in a Weekend!. The Baby Boomer’s Guide to Making Work Optional. He also publishes Retirement Intelligence, a free weekly award-winning newsletter. Bill can be reached online at MyRetirementSuccess.com.