(402) 397-5033 Jeff@omahaadvisors.com

As volatility creeps back into the marketplace the need for the guarantees that only annuities provide is only going to increase.

Retire with $500,000 but Spend Like a Millionaire

Inflation (CPI) went up 7 percent in 2021, the highest annual inflation increase since 1982.  A million dollars doesn’t go as far as it used to. In this guide, I will show you how to retire like a millionaire with $500,000.

This strategy works best if began at least 5 years before retirement. If you are approaching retirement you can use this retirement planning worksheet to gather the basic information you’ll need to create a retirement income plan.

If you are very close to retirement, or already enjoying it, you can use one of our annuity calculators to get a general estimate of how much an annuity would pay you.

How to Retire Like a Millionaire with Half the Money

A popular retirement income strategy is the 4% rule. The 4% rule assumes your investment portfolio contains about 60% stocks and 40% bonds. It also assumes your annual spending will remain the same each year in retirement.

Many market analysts now claim the 4% withdrawal rate is no longer feasible due to ultra low-interest rates and increasing inflation. A recent Wall Street Journal Article cited multiple well-respected researchers that claim 3.3% is now the safe spending rate in retirement.

Retiring with $1,000,000 using the 4 Percent Rule

4% withdrawal rate became standard in 1994 after Bill Bengen first demonstrated that it succeeded over most 30-year periods in modern history.

Christine Benz, director of personal finance and retirement planning; Jeffrey Ptak, chief rating officer; and John Rekenthaler, director of research, at Morningstar, set out to determine if the 4% withdrawal rule was still relevant today.

Using forward-looking estimates for investment performance and inflation, they found that a 50% stock/50% bond portfolio should support a starting fixed real withdrawal rate of about 3.3% per year, assuming fixed withdrawals over a 30-year time horizon and a 90% probability of success. This is because bond yields are low and stock valuations are high.

How Much Can You Spend if You Retire with $1,000,000?

Given all of the recent debate around the 4% withdrawal rule, I am going to compromise and assume a 3.8% annual withdrawal rate from the $1,000,000 portfolio. This is the most simple of all retirement income planning methods as you see below.

Depending on your school of thought, a one million dollar retirement nest egg could successfully generate $38,000 annually in most scenarios.

$1,000,000 x 3.8% = $38,000 of annual income

Retire with $500,000 and Spend Like You are a Millionaire

Now let’s look at an alternative strategy. It probably goes without saying but the best time to begin planning for retirement is 5 to 10 years before you plan to retire. This retirement income strategy works best if implemented at least 5 years before retirement; however, it improves the chances of success in almost any scenario.

Let’s use 60-year-old planning to retire in 5 years as an example. At age 60 we re-allocate $500,000 to a fixed index annuity with a lifetime income rider. 

I researched 56 Annuity Companies and more than 300 riders and found the best possible lifetime annuity payments for a 60-year-old deferring for 5 years. If you purchased this $500,000 annuity at age 60 it provides a guaranteed lifetime income payment of $38,239 beginning at age 65.

That’s slightly higher than the $1,000,000 portfolio assuming a 3.8% withdrawal rate; which may be generous according to the latest research.

$500K Annuity Purchased at 65 = $38,239 Annual Income

How Do You Calculate Lifetime Income Annuity Payments?

Most annuity income riders have what is called a “Guaranteed Roll-Up Rate”. The roll-up rate is a guaranteed interest rate that is applied to the annuity’s income base each year you defer your income payments.

The table below shows how the income base grows. In this example, the annuity pays a 10% bonus to the income base immediately. It also has an annual roll-up rate of 7% simple. The annuity’s lifetime income payments are calculated by multiplying your withdrawal percentage (based on your age) by the income base.

To clarify, you’ll notice the income base is $550,000 in 1 year. That is determined by adding the 10% bonus ($50,000 + $500,000 = $50,000 bonus). The income base grows by 7% ($38,500) simple each year after.

You can see in year 2 the income grew to $588,500 ($38.5K + $550,000). It will continue to grow by the $38,500 annually for 10 years or until income payments begin.