7. We need to save more to retire
While stocks for now continue to perform well, lower bond yields caused by the pandemic might make it harder to make ends meet on a fixed income.
For years, retirees have relied on the so-called 4% rule, which says you can withdraw 4% from your savings in the first year of retirement, and then give yourself an annual raise to account for inflation, without running a big risk of running out of money.
For someone with a $1 million portfolio, that formula produced an initial income of $40,000 and—assuming inflation of 2%—an increase to $40,800 in year two.
But today’s low bond yields mean future returns are expected to be lower than in the past, says David Blanchett, head of retirement research at Morningstar Inc. Mr. Blanchett says his safe-spending recommendation is now between 3% and 3.5%. That means that someone who wants to safely withdraw $40,000 in the first year of retirement needs to save closer to $1.2 million than $1 million.
Remember, kids - if you wanna live off of $40k a year, you'd best find an extra $200k to retire on, in addition to that million dollars you've managed to squirrel away. You've... got a million dollars, right? No? Well, you might wanna skip this next one. Here's an apprehensive piggy bank.