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How To Retire On Less Than $1 Million

Doug Carey, CFA

I spend a lot of time helping people understand how much money they will need to meet their retirement goals. Many of these infopeople believe that they must have at least $1 million saved in order to retire and never worry about running out of money. Today I want to show that many people do not necessarily need $1 million or more to retire comfortably. I will show an example couple who is very concerned that they won't have enough money saved. They also fear that interest rates will remain low and they don't want to just put everything into equity funds.

Like all retirement calculations, this one involves many assumptions. But as long as our assumptions are reasonable, say 7% for equity returns rather than the 10% figure that many people used to use, we can come up with a very reasonable estimate for how much money one needs to retire comfortably.

Let’s start with the assumptions I used for the couple we will look at:

Inflation (CPI)


Current Age of Both People


Age Of Retirement


Age When Both People Have Passed Away


Social Security at age 67 (combined)

$40,000 per year

Average Savings Rate

$10,000 per year

Total Investment Balance Today

$400,000 (50% in Taxable, 50% in IRAs)

Recurring Annual Expenses in Retirement


Investment Mix

70% U.S. Value Stocks,
30% Medium Term Treasuries

Return Assumption Value Stocks

7% per year

Standard Deviation Value Stocks


Return Assumption Treasuries

3% per year

Standard Deviation Treasuries



Before generating a retirement plan for this couple the first thing we need to clear up is, what constitutes success? We live in a dynamic world, especially when it comes to investing. So I like to look at the probability of never running out of money in retirement using Monte Carlo analysis, where thousands of scenarios are run, shocking investment returns in every scenario in every year. In this example I will define success as having a probability of at least 85% that funds never run out in retirement.

Using the WealthTrace retirement planner I calculated that they will have about $830,000 (in today's dollar terms) when they retire. I also calculated, using Monte Carlo analysis, that they would have a 70% chance of never running out of money.

We have two interesting things here: One is that they have less than $1 million at retirement. We also see that their probability of success is relatively low at 70%.

The question now is, how can we boost their probability of never running out of money? We know that they can move closer to their goal if they cut their expenses in retirement, save more money, or retire later. But let's assume that they are already saving the maximum amount they can and that they absolutely do not want to retire later or cut their expenses in retirement. Given this there are really only two ways this couple can increase their probability of retirement success: They can find higher returning investments with the same level of volatility they currently have or they can find investments that have the same returns, but less volatility.

My favorite way to reduce volatility while maintaining reasonable levels of return is to buy high quality dividend paying stocks that have a history of rising dividends over time. A few of my favorite dividend payers for retirement portfolios that have consistently raised their dividends over the years are Johnson & Johnson (JNJ), Sysco (SYY), AT&T (T), Wal-Mart (WMT), Coca-Cola (KO), and Eli Lilly (LLY).


Div Yield

3 Yr Div Growth Annual Rate

5 Yr Div Growth Annual Rate


























I replaced their Equity Value fund with the stocks listed above, equally weighted. I kept the same total return assumption, but lowered the level of volatility. In this very informative article the author shows that dividend-growth stocks have volatility levels that have historically been about 33% lower than non-dividend paying stocks. This makes sense because, in general, dividend payouts are much more stable than equity prices. If a stock derives, say half, of its return from dividends, then the volatility of its total returns will likely be much lower than non-dividend payers.

Given this, I lowered the volatility assumption on my dividend-growth stocks by 33% compared to my initial assumption on value stocks, which was 16.2% per year. So the standard deviation for my dividend payers is 10.7%.

The probability that this couple never runs out of money now jumps from 70% to 86%. This is a large jump, solely due to the fact that they are now invested in more stable, solid dividend paying stocks instead of an equity index fund.

To summarize, those who think that they must have at least $1 million when they retire aren't too far from the truth. But the situation can be changed for the better by picking those investments that have shown they can pay a relatively stable and growing dividend over time.

Each person and couple has a different situation and might need to change a variety of things in order to meet their retirement goals. But it is usually impossible to tell whether or not you can retire when you want until you sit down and actually run through the numbers. At that point you can begin running interesting scenarios that will tell you what you need to do to get to your goals. 

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Doug Carey, CFA