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.