I thought I needed $10 million to comfortably retire but now I think I can get by with less – is that too risky?

Reddit is a strange place, and a place apparently populated largely by millionaires looking for free financial advice from strangers on the internet. As financial strategies go, I hesitate to call that one particularly “good.” That said, it does generate some interesting ideas for financial writing.

Take this one post for example, apparently from a mid-30s millionaire with a $700,000 annual income and $2 million already saved up for retirement. (Wow!)

Turning to Reddit for advice, this very fortunate young man, we’ll call him “Mark” for short, says that up until recently he was under the impression that he would need to save up about $10 million in order to secure his retirement, with the standard rule of thumb-goal of withdrawing 4% from his savings to live on after retiring.

That would give Mark about $400,000 in annual income, pre-tax. And his goal was to retire on or about age 50, and coast on that $400,000 for the rest of his life.

Big dreams and big taxes

As dreams go, I’d say that’s a pleasant one. But how would it work in reality?

I suspect it would work something like this: First off, Mark’s $400,000 annual income from his savings would put him in the 32% tax bracket for a taxpayer married filing jointly. (Mark indicates that he has at least one kid, so I’m assuming he’s also married). The 32% only applies to income in excess of $383,900, however. Amounts below that mark would be taxed at lower rates.

Keep in mind that these rates change all the time, so take all these numbers with a few grains of salt. Still, back of the napkin, I guesstimate Mark’s tax liability on his retirement savings withdrawals would be roughly $80,000 a year, putting his after-tax retirement income at $320,000, give or take.

Now I know what you’re thinking. Retiring at age 50 would make Mark something of an outlier, as most people plan their retirements to arrive around about age 59-and-a-half, when they can make withdrawals from their 401(k) and IRA retirement accounts without paying penalties for early withdrawal.

So assuming Mark is draining actual retirement accounts to fund his retirement, he’d half to add a 10% early withdrawal penalty to his tax obligation, at least for the first 10 years. That would cut his income to about $280,000.

What about retiring early?

That’s still a hefty sum that should safely fund a long retirement. But now here’s where Mark decides to add a bit of risk to his life. What if, asks Mark, he were to retire earlier, at say age 45? And what if that meant he would have to retire short of $10 million in savings, say as little as $6 million? And just to make things really interesting, what if he increased the amount of his withdrawals to fund his desired lifestyle despite having less savings to work with?

What would Mark’s life look like then? Well, I’m afraid it would look a lot less certain.

Assuming Mark still wants $400,000 a year to live on, first of all he’s going to have to raise his withdrawal rate to about 6.7%, which is a lot more than most financial advisors would recommend. (And by the way, before taking any of the above advice to heart yourself, I’d heartily recommend running these numbers by your own financial advisor).

The other numbers would mostly remain the same, of course, tax rates and early withdrawal penalties and such. But at a 6.7% withdrawal rate, Mark’s savings would evaporate much faster. Worse, he’d be at increased risk of running out of money entirely, long before running out of life.

Assuming Mark has much of his wealth invested in the stock market, well, over the last 10 recessions, the stock market has declined 31% on average per recession. Granted, it’s recovered eventually after each of these recessions, but recoveries take time. If Mark gets caught in a recession at the wrong moment, his withdrawal rate could, temporarily, surge as high as $400,000 / 0.69 x $6 million = 9.7%.

Which is a rate I suspect might cause a financial advisor’s head to figuratively explode, even as it causes Mark’s net worth to literally implode long before his retirement is over.

So what’s my advice to Mark? There’s good reason financial advisors usually recommend withdrawing no more than 4% of your savings to fund your retirement. There’s also a good reason most people work well into their 60s before retiring.

Heed the advice of your elders, Mark. You may have more money than they do, but they have more wisdom than you do.