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All Contents © 2019The Kiplinger Washington Editors
By the editors of Kiplinger's Personal Finance
| June 14, 2018
Who wants to be a millionaire? The more intriguing question would be, “Who doesn’t?” For most people, a million smackers conjures up images of vacations on the Riviera, Arabian racehorses and mattresses stuffed with freshly ironed $20 bills.
But being a millionaire today isn’t all it’s cracked up to be. Low interest rates and high living costs mean a million bucks in the bank doesn’t necessarily allow you to retire at 35, 45, 55 or even 65. What’s worse, today’s million dollars comes with all the burdens of wealth: greedy relatives, rapacious lawyers and grasping investment advisers.
What’s so bad about feeling flush? Read on.
Financial advisers say a sustainable annual withdrawal from retirement savings is 4%. With a million-dollar nest egg, a 4% draw-down means annual income of $40,000. And that’s before taxes. If you stick with the 4% withdrawal rate and earn an average 8% on your money annually, you’ll be in good shape for the long run.
But can you really live on $40,000 a year? Most millionaires don’t want to. “If you are 45, 50, 55 years old and spend like a millionaire, then you are doing two things with your money that may well not work for you long term,” says Tom Davison, a financial planner in Columbus, Ohio. “The first is not saving extra dollars now, and the second is establishing a lifestyle cost that, for most people, will be hard to cut back on later.”
That being the case, let’s say you pull $100,000 a year from your savings, you earn 8% a year, and you don’t adjust upward for inflation. Here’s how your account would fare: at the end of Year 1, you'd have $972,000 left; Year 5, $835,735; Year 10, $594,376; Year 15, $239,741; and Year 18, $0. Yup — broke in retirement.
When most of us have an auto accident, we simply curse our luck, exchange insurance numbers and pay the deductible. When you’re a millionaire, however, lawyers are going to look to you to alleviate their clients’ “pain and suffering.” If your insurance doesn’t pay, those lawyers will be eyeing your million-dollar stash.
The best solution: Make sure all your insurance policies are up to date, particularly the liability portion of your auto and homeowner’s insurance. And consider a personal liability umbrella policy to cover what your other insurance won’t. Many umbrella policies will even pay for a lawyer if you need one. A million dollars of umbrella coverage costs about $150 to $300 a year, according to the Insurance Information Institute. The next million will cost $75, and every million after that will add $50 to your annual premium.
From those to whom much is given, much is expected – especially from needy relatives and friends. It’s nice to be able to help out, but it’s not so nice to be viewed as a walking ATM. And gratitude is often lacking. Adam Scott, a financial planner in Santa Monica, Calif., recalls one woeful client saying of a sponging sister, "I wouldn't care if she just invited us over for McDonald’s if just once she would invite us over."
There’s no hard and fast rule about lending to friends and relatives. “As financial advisers, we can help our clients prepare for retirement, but the cash-flow item that we can never fully prepare for is assistance to family members,” says Tom Balcolm, of 1650 Wealth Management in Fort Lauderdale, Fla. “It's happened to a number of our clients, and that is why we now build in a buffer to their retirement plans to account for this expense.” If your friends or family members ask for a loan, have your financial adviser draw up a loan contract. If they default, at least you can write off the loan as a bad debt on your income taxes.
It’s unseemly to complain about taxes when you’re sitting on a million bat hides, but that’s human nature. If you were to get your million all in one year as income, a couple filing jointly would be in the 37% tax bracket – meaning they would pay that much on income $600,000 and above. Under the new tax laws, you still might be subject to the alternative minimum tax, and your deductions for charity and other items would be reduced.
If you’re living on your income from a million you’ve already booked, consider investing in dividend-paying stocks (see 53 Best Dividend Stocks for 2018 and Beyond for picks). Qualified dividends are taxed at 15% for most taxpayers (20% once joint income exceeds $479,000).
Don’t overlook state taxes, as well. Living in a state with no income tax (or low income tax rates, at least) can save you a pretty penny.
If you continue to make big bucks, either earned income or investment income, you’ll face a variety of Medicare taxes and surcharges reserved for high earners like you. There’s the additional 0.9% tax on income above $200,000 for individual filers and $250,000 for joint filers. And the 3.8% tax on investment income of more than $200,000/individual and $250,000/joint.
Plus, four tiers of Medicare surcharges kick in as income rises above $85,000 for singles and $170,000 for joint filers. For example, the standard 2018 monthly Medicare Part B premium of $134 per beneficiary jumps to $187.50, plus a $13 surcharge for Part D, for singles with modified adjusted gross income between $85,001 and $107,000. The income range for joint filers is $170,001 to $214,000. At the highest tier, which kicks in for millionaires once income tops $160,000 for singles and $320,000 for joint filers, the monthly Medicare Part B premium runs $428.60 per beneficiary with a $74.80 surcharge for Part D.
The federal estate tax that stirs so much angst won’t affect you unless you’ve grown your estate to $11.18 million or more. But many states, realizing that the only certain things in life are death and taxes, impose estate and inheritance taxes that might force certain heirs to give up a portion of their inheritance from you. (Ultimately, this won’t matter to you, but it may annoy those heirs.)
And the state estate taxes can kick in at levels far lower than the federal threshold. If you live in Connecticut, for example, an estate worth $2.6 million can be taxed by the state. In total, there are 17 states plus D.C. that levy estate taxes or inheritance taxes (or both).
Back when you were a lowly thousandaire, most commission-based financial planners probably weren’t very interested in your business. After all, a 1% annual commission on $100,000 is just $1,000. Folks with smaller portfolios can sit down instead for a couple of hours once a year with a fee-only planner for a few hundred bucks.
Now that you have a million dollars, you need more help, and commission-based planners are probably way more interested in working for you. And why not? Your $1 million means a $10,000 annual fee, which will grow as your money does. Similarly, if you’re also invested in mutual funds that charge an average 1.25% a year in management fees, you’ll pay $22,500 a year in fees. If you were paying that to a contractor, you’d at least get a new bathroom out of the deal.
If you're comfortable managing your own investment decisions, think about using a low-cost online broker instead. Here are some of the best online brokers to consider. Or, try a so-called robo-adviser such as Betterment or SigFig. These automated online portfolio-management systems charge far less than a human adviser would.
When F. Scott Fitzgerald observed in The Great Gatsby that the rich are different than you and I, he meant that having wealth strips away basic necessities, such as figuring out where your next meal is coming from. Instead, it leaves you free to ponder other things, such as your own personality, your relationships with others, and the inevitability of death. These are questions many people would prefer not to ponder, and having a million dollars in the bank won’t change the answers.
While you’re working on making your fortune last, you may also want to volunteer in your community or join a nonprofit addressing social needs, such as education, health care, human services or the environment. Such work makes many older professionals and the newly retired continue to feel worthwhile, useful and productive.