THE FALLACY OF THE MILLION DOLLAR LUMP SUM 

 

The One Million Dollar Lump Sum

 

One million dollars sounds like a tremendous amount of money, and for most, it would

seem that this amount of money would give you a very comfortable retirement. 

Unfortunately this is one of the biggest mistakes potential retirees can make.

 

A defined benefit retirement plan is far superior to a defined contribution plan simply

because the mortality risk is spread out over a greater number of people than in a defined

benefit plan.  In the case of Delta Air Lines, it can statistically assume that the average

pilot will live to age 82, and then base all of its actuarial assumptions on the average life

expectancy.  When you are saving for a group of one, you no longer have the luxury of

assuming that you will live to the average age.  You must plan your estate so that if you

are one of the lucky few who live to age 90 that your money doesnt run out. A 55 year

old retiree must plan for a 35 year distribution life.

 

Three excellent studies have been done that estimate how much money can be withdrawn

from a fund and still insure there are adequate funds available after a 35 year period. 

William Bergan CPA, calculated that a 4.1% withdrawal rate would allow you to survive

the worst market declines over a 35 year period. Harvard University did a study and it

concluded that one could withdraw 4% a year.  The most famous study of all (one that

revolutionized the financial planning industry) the Trinity Study showed that a safe

withdrawal rate for a 35 year period was slightly less than 4%.  These investment returns

are based on investment returns before expenses.  Most people pay between .25% and 1%

in investment expenses.  Which leaves a 95% safe withdrawal rate over a 35 year period

of about 3.5% (adjusted for inflation).

 

Using a 3.5% withdrawal rate, you can see that a million dollar nest egg does not go very

far. This one million dollars would generate an inflation adjusted income of $35,000 a

year.

 

If the typical Delta Air Lines early retiree had a  $750,000 lump sum he would generate a

steady stream of income of $26,000 a year in retirement.  In addition, he would have to

pay approximately $1200 a month to continue to be a member of the Delta Pilots Medical

plan, leaving him with an income of $11,600 a year.  Well below the poverty level of 

$15,569 (US Census Bureau).  Someone with a lump sum of $1,000,000 would be left

with an equivalent income of $20,600.  Unless one has a substantial accumulation of

other assets, that one million dollar lump sum will not go very far, especially if ones

standard of living revolves around a current salary of $160,000 a year.  My

recommendation to any pilot contemplating retirement would be to seriously analyze

their own personal financial position and insure they can replace at least 80% of their

preretirement income. A one million dollar lump sum realistically isnt near enough to

retire on in the pre social security years.

 

Conclusion:  You cannot live on a million dollar lump sum alone.  Its not enough.