How Long $2 Million Will Last in Retirement in Hawaii

from GoBankingRates, May 2, 2024 

If you want to move away for retirement, Hawaii is literally as far away as you can get.

According to Hawaiian Airlines, the island chain is home to the world’s most isolated population center. Its residents live more than 2,400 miles from the closest land mass, the U.S. mainland. In fact, it’s so far from everything else that it has its own time zone.

But even if you don’t crave distance, you might have fallen in love with Hawaii’s pristine beaches, glimmering waters, ancient cultural heritage, majestic volcanos or lush tropical forests. You and everybody else.

Daily life in the world’s most isolated paradise is so cost-prohibitive that most people will never even get to take a vacation there, much less retire there — but what if you had $2 million to see you through? In much of America, a $2 million nest egg can buy smooth sailing for even the longest retirements.

In Hawaii, Average Pays the Bills — and Not Much More

The typical earner in Hawaii makes good, but not great money. According to Forbes, the average salary in the Aloha State is $61,420, or $23.35 an hour, putting it behind 16 other states whose average employees earn more.

Conventional retirement-planning wisdom says that retirees should expect to spend roughly 80% of their annual pre-retirement income after they leave their working years behind.

But 80% of $61,420 is $49,136, and that won’t cut it in Hilo or Honolulu because when it comes to living costs, Hawaii does not have 16 states in front of it. It has none.

Forbes reports that Hawaii is the most expensive state in America, with annual living costs averaging $55,491. If expenses were the Olympics, Hawaii would take gold or silver in most of the top categories:

• Most expensive transportation: $7,458 per year
• Highest real estate costs: $837,324 median home price, $5,004 monthly mortgage payment
• Highest rent: $2,423 per month
• Highest average income taxes: $7,850 per year
• Second-most expensive monthly housing costs: $2,059
• Second-most expensive annual food cost: $5,886

$80,000 Would Put You on Par With Other Expensive States

Hawaii’s personal finance dynamic — expenses that are extraordinary and incomes that are not — leaves many residents strapped for cash. The state’s average salary minus its average living expenses leaves less than $6,000 per year that isn’t spent on needs — $5,929, to be exact, or around $494 per month.

Forbes reports that no other state has a lower average disposable income.

By comparison, earners in the next four most expensive states — Massachusetts, California, New York and New Jersey — all have more than $20,000 in annual disposable income to play with after the bills are paid.

Since 80% of Hawaii’s average salary won’t even cover the necessities and the full average salary leaves you pinching pennies every month, how much annual income would a retiree need to live comfortably there?

Retirees with an $80,000 annual income would have $24,509 left over after paying Hawaii’s $55,491 average yearly expenses, making them roughly even with the average earner in high-cost states like New York and Washington in terms of disposable income.

$80K Is 4% of $2 Million. The 4% Rule Says 30 Years — Right?

The above arithmetic makes for a tidy calculation according to the gold standard of retirement planning. The 4% rule says you can withdraw 4% of your savings in the first year of retirement and then adjust upward for inflation each subsequent year for a nest egg that will last for 30 years.

Since $80,000 is exactly 4% of $2 million, that should be enough to retire comfortably for three decades with an average lifestyle, right?

Maybe in the Lower 48.

“In Hawaii, a $2 million nest egg’s longevity can be expected to differ significantly compared to the mainland due to higher living costs,” said David Blain, CFA, CEO of BlueSky Wealth Advisors.

Probably More Like 20 Years — Maybe 25

It’s likely that someone with a $2 million nest egg will enter this high-tax state in a higher bracket and in pursuit of an above-average lifestyle. On top of that, retirees have to account for escalating healthcare costs and the potential for expensive long-term care, which costs much more than average in the 50th state.

That — and all the other retirement cost considerations that become inflated in Hawaii — means either bigger or more frequent withdrawals, both of which lead to a shorter timeline for your nest egg’s demise.

So, if $2 million won’t last for 30 years in paradise, how long will it last?

“Basing calculations on our models at BlueSky, which account for a comprehensive range of expenses including healthcare, housing and taxes, this sum may provide for approximately 20 to 25 years of retirement, assuming a well-adjusted annual withdrawal rate of around 4%,” said Blain.

“However, this is a generalized estimate and actual duration could vary based on individual lifestyle and unforeseen costs. In states like Texas or Tennessee, where the cost of living and taxes are considerably lower, the same $2 million could potentially stretch beyond 30 years. It’s important to tailor financial strategies to accommodate these variations.”