$1 Million May Not Be Enough

The word "millionaire" has always had a beautiful ring to it. For many of us, myself included, it probably conjures feelings of financial security. But these days, it's not quite the financial silver bullet it used to be.

It depends
Having a million dollars means different things to different people. Imagine that you're 68 years old and about to retire, with $1 million as your nest egg. You're counting on those funds to carry you through your golden years. Our Rule Your Retirement newsletter argues that in order to make your nest egg last, you should conservatively plan to withdraw about 4% of it per year in retirement to live on. So 4% of $1,000,000 is about $40,000, or roughly $3,333 per month. Will that be enough? For many people, the answer is a resounding "yes!"

According to our friends at the U.S. Census Bureau, between 2006 and 2007, the real median household income was $50,233. Retiring on $40,000 may not get you to the middle of America, but it would come fairly close.

That may sound good, but remember the old real estate agent refrain: "Location, location, location." According to the ACCRA Cost of Living Index, living in Manhattan costs more than twice as much as the national average, so $40,000 would be like less than $20,000 there -- and that sure doesn't sound like much to live on. In Douglas, Ga., meanwhile, the cost of living is just 83% of the average, so living on $40,000 there would be like living on $48,000.

Then there are differences to consider between people. If you want your retirement to feature a lot of fishing at the lake down the road, and maybe some gardening and crossword puzzles, you might do just fine with that $40,000. But if you want to finally see the world and do a lot of traveling to visit grandchildren (with bags full of gifts), $40,000 may not be enough.

If you're young ...
Another critical consideration is age. If you're 65 and have a million dollars, that's quite different from being 40 with a million smackers. A 40-year-old might leave that money to grow in the stock market for another 25 years. If it grows at 10% per year, on average, it can become nearly $11 million by retirement time. Retire on 4% of that each year, and you'll be enjoying more than $400,000 annually. Amazing, eh?

And if that's not enough, remember that you might earn even more than that if you're invested in the right places. Consider some strong historical performers:

Of course, not all well-known giants fare well in the long run. Eastman Kodak (NYSE:EK), for example, has gained an average of about 4% per year since 1988, and it's lost about 70% of its value in the past year. Pfizer (NYSE:PFE), meanwhile, is priced lower than it was 10 years ago. I don't mean to suggest that these are lost causes -- only to point out that some seemingly great companies can falter. That's why it's important to select your investments well, and monitor them over time.

More considerations
If you've reached age 40 without amassing that million dollars, there's no need to grab the nearest sharpened pencil and try to commit hara-kiri. All is not lost.

Despite politicians' fear tactics, Social Security is likely to be with us, in some form or another, for a long time. You can probably expect to receive something from it in your golden years. Also, many retirees find that they spend less in retirement than they did while working. In addition, they're no longer forking over payroll taxes. And some of us even have pensions to rely on.

Despairing won't help you, but taking action definitely will. If you're not saving and investing regularly and aggressively, now might be the time to start. We'd be happy to help you via our Rule Your Retirement newsletter. Try it for free for a whole month -- you'll get full access to all past issues, including success stories from others who've retired early and are willing to share their secrets.

Further Foolishness for a happier portfolio:

• Avoid a Lifetime of Regret
• How to Salvage Your Retirement Plan Now
• The Perfect Plan For a Profitable Portfolio