We have $250,000 in the bank and $1 million in savings to retire debt free. We should get $50,000 a year from the million. Where should I put it?
-Rob
First, congratulations on saving $1 million for retirement – I’m sure a lot of hard work went into this! You have also done a great job of building a bank account that you can use for emergencies or other immediate needs. When you combine these two asset bases with your debt-free balance, you should be in a strong position to meet your $50,000 a year income goal.
Deciding how to manage your financial assets is important before and after retirement. A financial advisor can help you choose and manage investments for your retirement portfolio.
Before exploring options for investing your retirement savings, it’s important to first assess your goals. Above $50,000 a year the goal is easy to achieve, but some nuances can be relevant and worth exploring. There are some additional things you should consider before deciding where to invest, so we’ll dig into those before talking about potential investment options.
A couple who are about to retire look at potential income.
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As with any financial planning decision, you should always start with your goals. It appears that making money is your main goal. But are there other long-term goals this one million dollars should help serve? For example, do you want to protect the principal’s value over time and possibly leave money for heirs? Or do you want to use this boss down on retirement?
If we take the $50,000 annual income goal at face value, then the required return of 5% is achievable and by no means overly ambitious. You can buy a single-premium immediate annuity today and get this rate. However, if principal protection is required, then inflation must be factored into your calculation. Assuming that inflation is positive in the future, you would need a higher rate of return than 5%. Further, if you wish to leave a legacy as part of your estate plan, then you will need to think about how much money you want to leave behind – this will also affect your return needs.
(If you’re not clear on your financial goals, consider getting in touch with a financial planner and talking about it.)
There are many other factors to consider related to your goals before making an investment decision. We have already mentioned one – inflation – but here are some additional points:
Important financial period: A dollar today is worth more than a dollar in the future. Considering the time value of money, spending $50,000 a year would cover the entire balance of $1 million in just over 14 years. Does this deadline coincide with your retirement?
Age and money Similar to the above concept, when do you expect to leave and for how many years will you be drawing from your portfolio? Will you be working longer and able to maximize the value of your capital investment? Does this $50,000 cover all of your expected living expenses or will you have additional expenses, such as Social Security or employer-sponsored retirement plans to provide additional assistance? These questions directly guide how much risk you can take with your investment.
Long term storage: The most common retirement savings are long-term savings. These costs can quickly wipe out savings in the absence of long-term care insurance. Do you have long-term care insurance in place to protect against the risk of ending your life early?
(A fiduciary financial advisor can help you evaluate and plan these things, among others. Find a fiduciary financial advisor today.)
A retired couple adjusts their retirement savings, shifting some of their money toward savings.
In the context of the possible goals and considerations explained, let’s examine some investment options.
As mentioned earlier, if you only want to make $50,000 a year, not adjusted for inflation, and you don’t want to save or grow your principal, buying a single-premium annuity is a straightforward solution. Another safe, financially focused option is to build a portfolio of laddered securities or certificates of deposit (CDs). However, this can bring investment risk as well. Since interest rates are close to your 5% target, there is no guarantee that they will remain in the future. You can create an annuity or build a higher income ladder that matches your expected retirement age.
If you want the $50,000 annual withdrawal to keep up with inflation, or if you want to save or even grow that $1 million over time, then you should consider investing in a more diversified portfolio. You can build an income-focused portfolio that includes both bonds and high-yielding stocks that can produce your desired level of annual income while preserving the value of your principal. This option can be attractive if you think you need to spend more flexibly in retirement, on things like gifts or travel, or if you’re worried about spending your savings.
(And if you need help deciding how to invest your retirement savings, consider working with a financial advisor.)
On the surface, the question of where to invest may seem simple if you have an annual goal in mind. However, if you reveal the true nature of this goal, along with other relevant considerations, the question becomes more complex. Understanding your goals at a detailed level and the factors that can influence whether you succeed in achieving these goals will ultimately help you make the best and most unbiased investment decision.
As you can see, planning for retirement can be difficult and overwhelming. However, a financial advisor can help you navigate the process. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with three financial advisors serving your area, and you can have a free initial call with your advisor match to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
It is important to maintain an emergency fund with enough money to cover between three and six months of living expenses, even in retirement. An emergency fund should be liquid – in an account that isn’t as vulnerable to big swings as the stock market. The tradeoff is that the financial value of water can be reduced by inflation. But the high-interest account allows you to earn more interest. Compare savings accounts from these banks.
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The post Ask Your Advice: We Have $1.25M in Retirement Savings and Want to Withdraw $50k a Year. How Should We Put It? first published on SmartReads and SmartAsset.
