Will Your Nest Egg Be Enough?

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If you’re near or at retirement, you’ve likely arrived at this point with an eye to the future. You took the steps to set money aside, invest and prepare for your golden years. You’re getting ready to say good-bye to the stresses of your career and hello to more time with the family, travel, and enjoying your personal passions. Your nest egg may be looking fat and sassy about now—if so, congratulations. But are you sure you’ve got enough? As any mama bird can tell you, you’ve got to be aware of the egg stealers, taxes and inflation.

To look at the impact of taxes and inflation, let’s say you have a million-dollar nest egg, and it’s earning 7.2%. (Before I go on, you may be wondering where I got that 7.2% from. I like to use worst-case scenarios when illustrating earnings, so guess where I went? During the worst economic decade in American history since the Great Depression, February 1999 to February 2009, if you would have used indexing, you would have earned an average of 7.23%. While many people in the market did not earn that—they earned less than 3.5%— but for sake of this illustration we’ll use indexing and go with 7.2%.)

So, if you’re earning 7.2% interest on $1,000,000, that means that, theoretically, you should be able to pull out $72,000 a year for living expenses without touching your principal, which equals what? Yes, $6,000 a month.

Now this is where folks think, “Oh, I can get by on $6,000 a month!” But what are they not considering? They’re not subtracting the effective taxes and inflation on this. If you take $72,000 a year, with federal income tax, state income tax, FICA, Medicare, and then, of course, gasoline tax, sales tax, property tax, tax, tax, tax … (you get the idea), at least one-third of that income will be going out the window in some kind of tax.

Doing the math, this means you have $24,000 less to live on each year. You’re now down to $48,000 a year, or $4,000 a month after taxes, to cover everything from gas and groceries, to prescriptions and golf green fees. Not too terrible, you’re thinking, right? Well, we’ve only subtracted the effective tax.

What about inflation? If inflation averaged, say, 10% (because it looks like we’re headed for double digit inflation), in less than 15 years, your $48,000 will only buy what $12,000 buys today. Looking at monthly income, $4,000 a month will only buy what a $1,000 a month buys today. Even if we don’t hit double-digit inflation, if it averaged even 7.2% inflation, your dollar value will drop the same amount in 20 years.

Just when you thought that million-dollar nest egg would be enough to last you a good 20-30 years into your final chapters of life, you may need to rewrite your story. You need to have a retirement strategy that protects you from taxes, because you will want a tax-free income. And you want a plan where inflation helps you, instead of hinders you, where your return is linked to the things that inflate.

For over four decades I have worked with some of the nation’s most successful people, as well as everyday earners, to help them identify the best retirement strategies to ensure they can enjoy an abundant life now, and in their advanced years. Don’t assume your nest egg will be the gift that keeps on giving, at the level you’ll need it to give. If you’re on the cusp of retirement, there is still plenty of time to realign your strategies and give yourself the gift of security, liquidity and safety of return so you can enjoy a bright, abundant future.

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