Q. A financial advisor recently told a friend that no one should retire unless she has at least $1 million in financial assets and no real estate mortgage. I am 66, a recent retiree, and have about $900,000 in financial assets. I also have income from two pensions of $2,000 a month, Social Security of $1,400 a month, and annuity payments of $3,000 a month. My home is almost paid for and is valued at about $170,000. I have no debt except two car payments. I am considering selling my present home and buying another where I would have a $150,000 mortgage.

Does this seem reasonable to you and what do you think about the $1 million and no mortgage? If this is accurate, I would think very few people in this country could ever retire.

---F.S., by email from Richmond, TX

  

A. The size of the nest egg we need in retirement depends entirely on the standard of living we hope to maintain once we stop working. That $1 million figure is just plain silly. Whatever the visible affluence of America, it remains that most people have modest incomes and modest savings, before and after retirement. So they won't "need" a million dollars to retire.

Using replacement rate figures from the Georgia State University Retiree Income Replacement Project, for instance, I calculated that a $50,000 earner with a non-earning spouse would need a nest-egg of $385,000 to maintain their purchasing power in retirement. Only after family working income exceeded $80,000 a year did the nest egg requirement hit a cool million. That means most American families aren't going to need $1 million to retire. That's a good thing because few have it. (If you'd like to see the actual figures, check the URL at the end of the column.)  

With $5,000 a month in pensions and annuity payments, you have the income equivalent of a $1 million bond portfolio--- in addition to your $900,000 nest egg. Since you have so much fixed income, it is entirely reasonable for you to have a fixed mortgage. Basically, the $150,000 mortgage you expect to have will 'neutralize' or offset a portion of your pension and annuity income.

Having the mortgage will allow you to add the equity from the house you sell to your financial assets, giving you a better hedge against inflation.

Bottom line: You're in great shape.

  

Q.   At what level of net worth would you consider it reasonable to drop health insurance? At some point those households with significant wealth (but not more than $10 million) would be better off investing those premiums and assuming the risk themselves.

---G.P., by e-mail from Houston

  

A. Health insurance is different from most other forms of insurance in that the liability we face can be so enormous. For that reason, a wealthy person should always buy health insurance but should buy policies with larger and larger deductibles.

Let's do a comparison. When you insure your car with a $100 deductible, you pay a premium that will protect you from a loss that is no greater than the value of the car. Even a luxury car, however, would be a small loss relative to the kinds of bills a major illness can create. When we insure a car, we insure ourselves against losses that would be a hardship. We can control that with the size of the deductible.

People with limited incomes and assets, for instance, should have low deductible policies because they can't afford losses. A person who earns $200 a week can be undone by a $500 bill and should probably take a $100 deductible. A person who earns $2,000 a week, however, can afford a $500 loss.

Many people who have income and assets own older cars. They may decline to buy collision insurance because they can afford a loss of, say, $5,000 or even $10,000, if it occurs.

With health insurance, however, we are always dealing with losses that can be much, much greater. That's why you'd raise the deductible and lower the premium--- but you wouldn't drop the insurance.

On the web:

Tuesday, June 15, 2004:   A nest egg that won't crack easily