As a child growing up in the 1970s and 1980s, I thought a million bucks was a mythical amount of money. I clearly remember wondering if I would ever be a millionaire. Would I have a sports car, a huge mansion and an overflowing bank account, like the rock stars I watched on MTV?
Now that I'm a financial advisor — and nearly 40 years old — I understand the harsh reality that $1 million isn't what it used to be. I also know that people who spend lavishly on material possessions aren't necessarily that wealthy. Lastly, $1 million isn't some amazing amount of money at all; in fact, it may not even be enough money for a comfortable retirement.
I had to explain this to a client a few years back. He had approximately $1 million in assets and wanted to retire early. For several reasons, I explained that his impressive nest egg wasn't quite enough. I'm not sure he believed me at first, but he followed my advice and kept saving.
He returned about a year later in hopes my opinion had changed. It didn't, and for the second time, I had to tell him he wasn't ready to retire yet. Finally, after another year of building an additional $300,000 in assets in retirement savings, I happily gave him the green light.
While every financial situation is unique, I've seen this kind of thing happen time and time again. People get some magic number in mind and decide that, when their investments reach that point, they've finally made it. Unfortunately, it's not quite that easy. Further, most financial advisors agree there are myriad working parts to consider.
According to financial advisor Don Roork of Asset Dynamics Wealth Management, some of the factors include returns, withdrawal rates, rates of return on the portfolio, taxes, current bond yields, inflation expectations and drawdowns from the client's portfolio during declining market environments.
Remember, the amount you save for retirement needs to last until you die. And since you can't predict the future, you need to plan for a long and fruitful life.
Here are five reasons a $1 million nest egg could leave you short, according to financial advisors from around the country:
1. Health-care spending. Health-care needs are often overlooked when it comes to retirement planning. Unfortunately, bridging the gap between early retirement and Medicare at age 65 can be an expensive undertaking, said Benjamin Brandt, a financial advisor at Capital City Wealth Management.
The earlier the retirement, the larger the gap. "A super-sized emergency fund, fully funded Health Savings Account and non-retirement long-term savings can go a long way toward meeting these future needs," he said.
Unfortunately, too many early retirees forget to plan for this aspect of their future lives until they're already there.
2. Long-term care. Long-term care is rarely mentioned by early retirees, mostly because people assume they won't need it. But this is one area where you could suffer if you don't plan ahead. The average annual cost of an assisted-living facility in the United States was $43,536 last year. And in 20 years the projected annual cost for that same level of care is expected to be closer to $78,636 a year, according to a 2016 Genworth Cost of Care research study.
"Factoring in those expenses could easily wipe out even a million-dollar portfolio in a short and devastating fashion," said Josh Brein, a financial advisor with Brein Wealth Management.
Good financial advisors will instruct their clients on this risk and introduce them to long-term care insurance and other alternative insurance products that fit clients' needs.
3. Retirement lifestyle. A large component of retirement planning is figuring out exactly how much you need to spend. But not everyone takes the time to run those numbers, said Martin A. Smith, founder of WealthCare Financial Group.
Smith suggests future retirees sit down and ask themselves a string of important questions. For example, do you plan on living in the same house or downsizing? Do you plan on providing for elderly parents or adult children? Have you paid off your home yet, or do you intend to?
"The truth is, everyone and everything will have a plan for your money, even if you don't," he said. "Whether it is a company on 5th Avenue, a vacation resort company or — God forbid — even Las Vegas, they have a plan for your money!"
If you don't take the reins, the natural current of lifestyle expenses can easily eat away at your nest egg. To combat this, you need to know exactly how much you plan to spend each month so you can calculate against your retirement funds to ensure a safe rate of withdrawal.
4. Inflation. Another key factor future retirees most often forget is one you never see: inflation. To be honest, nobody realizes how much inflation can erode their purchasing power, because it happens at such a slow pace.
If inflation were to rise at 3 percent annually, most investors are not going to notice it much year over year. However, your purchasing power will nearly be cut in half over 20 years. A good financial advisor will factor inflation into your retirement plan so you're not left holding the bag.
5. Taxes. Another factor in retirement that is mostly forgotten about is taxes – now and in the future. Since no one has a crystal ball, it is still fairly safe to assume income taxes could rise over the next 20 years. That's why it's important to at least account for that possibility in any comprehensive retirement plan. If you fail to consider the possibility of higher taxes in the future, your money could disappear a lot faster than you think.
While saving $1 million is a huge milestone and something to be proud of, you more than likely will need more cash than that in retirement.
The best way to find out if you can retire is to run the numbers and consider a few different scenarios.
Most financial advisors suggest starting with the 4 percent rule – a rule that lets you gauge the longevity of your nest egg based on projected annual withdrawals from retirement accounts of just 4 percent. Or you can consider the "multiply by 25" rule, which states you should multiply your income by 25 to figure out how much you need.
— By Jeff Rose, founder and CEO of Alliance Wealth Management