For Retirees....The Million Dollar Illusion

A MILLION dollars isn’t what it used to be. In 1953, when “How to Marry a Millionaire” was in movie theaters, $1 million bought the equivalent of $8.7 million today. Now $1 million won’t even buy an average Manhattan apartment or come remotely close to paying the average salary of an N.B.A. basketball player.     

Still, $1 million is more money than 9 in 10 American families possess. It may no longer be a symbol of boundless wealth, but as a retirement nest egg, $1 million is relatively big. It may seem like a lot to live on.

But in many ways, it’s not.

Inflation isn’t the only thing that’s whittled down the $1 million. The topsy-turvy world of today’s financial markets — particularly, the still-ultralow interest rates in the bond market — is upending what many people thought they understood about how to pay for life after work.

“We’re facing a crisis right now, and it’s going to get worse,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “Most people haven’t saved nearly enough, not even people who have put away $1 million.”

For people close to retirement, the problem is acute. The conventional financial advice is that the older you get, the more you should put into bonds, which are widely considered safer than stocks. But consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.

Suddenly, that risk-free bond portfolio is looking risky. “The probabilities are remarkably grim for retirees who insist on holding only bonds in the belief that they are safe,” says Seth J. Masters, the chief investment officer of Bernstein Global Wealth Management, a Manhattan-based firm, which ran these projections for Sunday Business. “Because we live in this world we tend to think of it as ‘normal,’ but from the standpoint of financial market history, it’s not normal at all,” Mr. Masters said. “And that’s very clear when you look at fixed-income returns.”

Several rounds of intervention by the Federal Reserve and other central banks, aimed at stimulating a moribund economy, have helped to suppress rates, and so has low inflation. Low rates have led to cheaper mortgages and credit cards, helping to balance family budgets.

But for savers, low rates have been a trial. The fundamental problem is that benchmark Treasury yields have been well below 4 percent since early in the financial crisis. That creates brutal math: if your portfolio’s income is below 4 percent, you can’t withdraw 4 percent annually, and add inflation adjustments, without depleting that portfolio over time.

And with rising life expectancies, many people will have a lot of time: the average 65-year-old woman today can be expected to live to 86, a man to 84. One out of 10 people who are 65 today will live past 95, according to projections from the Social Security Administration.

“If you’re invested only in bonds and you’re withdrawing 4 percent, plus inflation, your portfolio will decline,” said Maria A. Bruno, senior investment analyst at Vanguard. “That’s why we recommend that most people hold some equities. And why it’s important to be flexible.” In some years, investors may need to withdraw less than 4 percent, she said, and in some years they can take more.

Clearly, such flexibility depends on individual circumstances. Billionaires can afford to be very flexible: just 2 percent of a $1 billion portfolio is still $20 million. With economizing, even a big spender should be able to scrape by on that. But $20,000 — the cash flow from a $1 million portfolio at 2 percent — won’t take you very far in the United States today.

And if you’re not close to being a millionaire — if you’re starting, say, with $10,000 in financial assets — you’ve got very little flexibility indeed. Yet $10,890 is the median financial net worth of an American household today, according to calculations by Edward N. Wolff, an economics professor at New York University. (He bases this estimate on 2010 Federal Reserve data, which he has updated for Sunday Business according to changes in relevant market indexes.)

A millionaire household lives in elite territory, even if it no longer seems truly rich. Including a home in the calculations, such a family ranks in the top 10.1 percent of all households in the United States, according to Professor Wolff’s estimates. Excluding the value of a home, a net worth of $1 million puts a household in the top 8.1 percent. Yet even such families may have difficulty maintaining their standard of living in retirement.

“The bottom line is that people at nearly all levels of the income distribution have undersaved,” Professor Wolff said. “Social Security is going to be a major, and maybe primary, source of income for people, even for some of those close to the top.”

Professor Munnell said that in addition to relying on Social Security, which she called “absolutely crucial, even for people with $1 million,” other options include saving more, spending less, working longer and tapping home equity for living expenses. “There aren’t that many levers we can use,” she said. “We have to consider them all.”

 Between 2012 and 2050, the United States will experience considerable growth in its older population (see Figure 1).2 In 2050, the population aged 65 and over is projected to be 83.7 million, almost double its estimated population of 43.1 million in 2012. The baby boomers are largely responsible for this increase in the older population, as they began turning 65 in 2011.3 By 2050, the surviving baby boomers will be over the age of 85.
 How are we going to care for this aging population who are not adequately prepared financially. We owe them something for all the years they have contributed to the economy and the culture. We can't ignore them or allow them to die from hunger, lack of  shelter or medical care. They deserve respect, some dignity and a decent amount of comfort.
The elderly are treated shamefully in many civilized western countries. It's about time we remembered where we came from and where we hope to be at their age.