It’s difficult to imagine an impoverished millionaire, but this could soon be the fate of the baby boomers, 8,000 of whom will reach age 60 each day in 2007.(1)

Since the concept of modern retirement took hold in the 20th century, only a small percentage of retiring Americans have left the workforce with at least a million dollars in assets. Being a millionaire retiree has never really been the status quo, but now this amount may not be nearly enough to maintain even a modest retirement lifestyle.

If you are reading this, it means that you are probably among a select group of high–net–worth individuals. But even after you earn your first million, you need to be careful not to assume that a comfortable retirement is in the bag, especially if you are not prepared to accept a lower standard of living in retirement.

The Numbers: Crunch or Be Crunched

How much income could a hypothetical 60–year–old retiree with a million–dollar portfolio expect to spend each year without running out of money? Assuming that the portfolio earned a conservative 5% annual return before taxes—a realistic expectation for an investor who is concerned about current income and preservation of capital—a retiree could withdraw $50,000 per year and never run out of money.2

But this estimate does not take inflation into account. If the hypothetical investor needed to increase withdrawals by 3% each year to help keep pace with inflation, the million–dollar portfolio would be exhausted by age 86.3

Of course, your exact situation will vary based on variables such as the actual return from your investments, the age at which you retire, whether you will work in retirement, and your health and life expectancy. Your situation would also vary if you wanted to pursue higher returns. Remember that investments seeking to achieve higher rates of return also involve a higher degree of risk.

High–net–worth individuals stand the best chance of reaching their retirement goals, but not without careful management and a realistic outlook. Maintaining your purchasing power, managing investment returns, and conserving your estate are all within reach, but the time to begin preparing for them is now.

1) InvestmentNews, March 19, 2007
2–4) This hypothetical example is used for illustrative purposes only and does not represent any specific investment. Actual results will vary.

Poverty and the Modern Millionaire