I grew up in Michigan and absolutely love it here. I’ve lived in Michigan essentially my whole life outside of an eight year ski trip that I took to Colorado. I was lucky enough to meet my wife in Colorado and after getting married, we had some decisions to make. We knew we wanted children and we also knew we wanted to live closer to our families. Unfortunately, our families don’t live close to each other. We could afford to move into a small 1 bedroom apartment in San Francisco, where she is from. Or, for about the same price, buy a large 3,000 square foot home on a lake here in Michigan. Fortunately, we decided on the later, partly because we could live a lot more comfortably on less here in Michigan. It didn’t hurt that she fell in love with the Michigan summers, and I was smart enough not to tell her about the winters.
So, it came as no surprise to me when I stumbled upon this chart:
According to the chart, $1 million in retirement savings will last a 65 year old, over 24 years in Michigan. In California, the same amount only lasts 15 years. In theory, this makes sense, as I could afford three houses here in Michigan for the same price as the one my brother-in law owns in California. Also, trust me, you don’t want to know how many paychecks a date with my wife set me back out in California. So, the next question is how did they figure out how long $1 million lasts in Michigan? This is where the numbers start to get a little fuzzy:
- The article starts by looking at the average yearly expenditure of a person over the age of 65. According to the BLS, a person over the age of 65 has average annual expenditures of $45,756.
- Now, we have to adjust this $45,756 to make it state specific. According to this table, in Michigan the cost of living is 92.4% of the average American. That means here in Michigan, a person over the age of 65 will typically spend $41,318. By comparison, in California, the same person would spend $66,621 per year.
- Now, divide your $1 million in savings by yearly expenditures of $41,318, and your money here in Michigan should last a little over 24 years, or until you are 89.
Sure, this may all make sense, but this is missing a few pretty large assumptions. First, almost no one strictly relies on savings for their sole income in retirement. Sure, if you are younger you may want to assume that social security will not be available when you retire. Yet, for retirees turning 65 right now, you will almost certainly have social security and potentially a pension. Also, just because you are retired, doesn’t mean that you don’t pay taxes. This chart above assumes everything is paid after-taxes.
The truth is that $1 million in retirement savings in Michigan should last you forever if you only have only $41,318 in yearly expenses. Remember, there are typically 3 sources of retirement income; investment withdrawals, social security and a pension.
There are different safe withdrawal formulas but I have always believed that a 5% withdrawal strategy should be considered safe. In other words, a 65 year old should never exhaust her assets if she withdraws 5% per year from her retirement savings. Therefore, she could withdraw $50,000 per year (inflation adjusted) for the rest of her life and not worry about running out of money. This alone (not including taxes) would cover the $41,318. .
Next up, is one of the biggest sources of income for most retirees, social security. The amount of social security that you receive varies depending on how much you earned and how long you worked. That being said, if someone has worked and made pretty good money throughout her career, I would expect around a $2,000 monthly social security benefit. And if she is married, her husband would also be able to collect a benefit. Again, using estimates I would expect a single retiree to have around a $2,000 monthly benefit at age 65 and a family to have nearly $3,000. Obviously, these numbers are estimates but the original article doesn’t even take in account social security.
Pensions may be going away but still many 65 year old retirees still have one today. We live in Michigan, and many auto workers as well as school and municipal workers have nice pensions at age 65. For younger generations, including myself, pensions are a pipe dream but for many people, pensions are still alive and paying well.
So, if you include investment withdrawals, social security and potentially a pension, meeting an average expense of $41,318 should not be a problem. The real question is, how much can I afford to live on if I do have $1 million in retirement savings? Again, if you get $50,000 from investment withdrawals, plus around $36,000 per year from social security for a family, plus a potential pension, you are looking at well over $80,000 per year in retirement income. At that type of money, you may even be able to afford a vacation to California.