A million dollars was a lot of money when I was a kid. Inflation notwithstanding, for most of us, it still is! It?s an amount the vast majority of people will never have in their bank accounts or anywhere else in their possession. But will a million dollars be enough to retire on?
It?s practically a MINIMUM if you plan on enjoying the textbook full retirement.
Think about all of the retirement scenarios laid out for us in the financial universe; at the heart of nearly every one of them is a big, fat 401k with a seven figure balance to keep us pampered and well provided for in our golden years.
A Picture Perfect Scenario
A million dollar retirement nest egg is as easy to build up as 1, 2, 3?isn?t it?
Let?s run some numbers. Let?s say you participate in your company?s 401k plan, and your income is sufficient to max out your contributions at the current allowance of $18,000. You?re 40 years old, and you?ll be making that contribution in each of the next 25 years. We?ll blend a rate of return on a balanced portfolio consisting of both stocks and fixed income investments, with at an average of 7% per year.
Since this is a perfect world projection, we?re going to ignore the possibility that you could lose your job at some point over the next quarter century, interrupting your contributions for an indeterminate period of time. As well, we?ll assume that another extended zero return (or worse)?period, such as the 2000-2010 decade,?the 1930s and the 1970s, were complete aberrations and therefore entirely unlikely to re-occur in our lifetimes.
$18,000 contributed each year, for 25 years at 7% will produce a balance of $1,181,209, so let’s round that up to and even $1.2 million at age 65.
You?ll be a millionaire! That was easy, wasn?t it?
Will a Million Dollars be Enough to Retire on – and What Will it Buy You?
From where we sit today, $1.2 million is a big chunk of change. Can you imagine not being able to retire on that much money???
Well, it?s actually quite possible.
We all know that prices rise over time. For reasons too complex to cover here, inflation is built into our economic and financial systems. We can bet on it continuing in the future for all of the same reasons it has in the past?what ever those reasons may be.
Let?s look at what inflation can do to $1.2 million dollars over the next 25 years. Since there?s no way to project future inflation with any degree of certainty, let?s use recent history as a metric. What has inflation done to the value of money over the past 25 years?
Based on the consumer price index, it would take $174.72 in 2017 to buy what $100 would have bought in 1992, 25 years earlier. Translation: a dollar today is worth only about 57 cents compared to the 1992 dollar, or slightly?more than half.
Just basing inflation over the next 25 years on the past 25, it?s reasonable to conclude that our $1.2 million will be worth only a little more than half in real terms what it is today, or about $683,813. That means that 43% of our future portfolio value is vaporized by a factor which is totally beyond our control!
We?re not even going to consider the fact that inflation won?t disappear from the scene once we turn 65 and how THAT impacts the projection!
Weak Rates of Return on Low Risk Investments
Once we reach 65 will we continue to invest in the stock market, gathering our 7% returns annually? The answer to that will be different for each of us. But I?m willing to bet that by the time most of us hit that age, we?ll be more conservative if only because we?ll no longer have the time horizon to recover from large, sudden losses.
Let?s assume that you?ll invest 100% of your money in super safe 10 year US Treasury notes, currently paying 2.38%.? 2.38% of $683,813 is $16,346 (remember, we?re adjusting the $1.2 million down for the ravages of 25 years of inflation). That?s?$1,362 per month in today’s dollars.
Do you think that you can enjoy the prosperous, golden retirement of your dreams on $1,362 per month?
It?s kind of humbling isn?t it? $1.2 million dollars ? a very impressive pile of money from where we sit today ? reduced to a benefit of just $1,362 per month? It almost doesn?t seem worth it. That?s a lot of doing without during your working years to provide a relatively modest benefit at the end.
Now the optimist will argue that you would probably continue to be heavily invested in the stock market, even after retiring. That’s possible, and I think that may be the case – until the stock market goes into one of its completely predictable tailspins.
What a lot of optimists don’t get is that risk tolerance changes as you get older. A 50% decline in a stock portfolio – that maybe a 30-something investor might “ride out” – looks like a serious threat to the survival of someone in their 60s, 70s or 80s. Maybe so much so that the older investor bails out of stocks in favor of greater safety. After all, older investors don’t have the time horizon to wait out a market decline – they need income now.
How Likely are You to have a Million Dollar Retirement Portfolio?
But let?s touch on something even more basic. While we can ?see? the possibility of accumulating a seven figure retirement balance through regular contributions combined with the magic of compounding over an extended period of time, the fact is – barring a runaway inflation – relatively few of us will ever amass such a fortune!
Are you planning for, or even considering, this possibility?
John Lennon once said, ?Life is what?s happening while we?re making other plans.? I was never a big fan of his, but this point is painfully brilliant.
Most of the people who will retire with millionaire status will already have achieved that wealth level well before retirement. According to recent statistics, there were 10.8 million people in the US who are worth $1 million or more at the end of 2016. That’s an impressive number on the surface, until you consider that there are nearly 126? million households in the country. That means that only about 8.6% of US households are millionaire households. Put another way, 91.4% of households aren’t.?
Am I suggesting abandoning the accumulation of money for retirement? No. But what I am proposing is diversification of retirement planning, in much the same way we might diversify a retirement portfolio.
Sustenance from several clearly defined sources. Only by developing them do we begin to truly provide for our retirement years. That means lowering expectations, to perhaps semi-retirement, versus the full-blown version.
And that brings up the Million Dollar Question: what career will you have in retirement?
If you’re interested in developing additional income streams, either for retirement or to help prepare for it and fund it, check out my post on freelance blog writing. It’s the kind of work and business you can easily run well past retirement age.
Can you think of any strategies to help prepare for retirement apart from retirement savings alone?
Another thing to think about is lifestyle inflation. For instance, someone retiring in 1990 wouldn’t have thought a home computer and a mobile phone was a requirement, so they won’t have factored them into their equations.
Some of this washes out, but in an ideal world you’d keep up with income inflation, not real world inflation, if you plan on keeping up with the young Jones’ next door for at least a couple of decades.
Sorry to make a hard job harder! 🙂
Monevator – Good choice of words, “making a hard job harder”. That’s kind of the point, the financial media has oversimplified the job of preparing for retirement, as though all we need to do is faithfully make our allotted retirement plan contributions and all will be well with us at 65.
While we’re certainly better off having a fat 401k than being without it, we shouldn’t be complacent about that either. Eliminating debt, lowering living expenses, taking care of our health and finding additional sources of income for what may look more like semi-retirement than full retirement, are all at least as important.
A 401k plan may not be the magic bullet everyone thinks (wishes?) it to be.
This is a sobering analysis. Two things come to mind: 1) People need to work hard to get out of debt and build an emergency savings so they can get to the investing stage of their lives as soon as possible; 2) It’s important to find your life purpose and know what you will be doing in the later years of life. Perhaps fulfilling this mission or purpose won’t require as much living expenses as one might think, but regardless it’s still important to invest for the future.
Jason – Exactly! You’ve said in a 100 words what took me a 1000! (Jason is an oustanding blogger at OneMoneyDesign BTW, and his posts appear on various sites around the web!)
Retirement probably won’t be as simple as the math equation the experts make it out to be. And we haven’t even gotten into the possibilies of future stock market crashes, etc, that will cloud the picture even more. It’s the old saying about not putting all of your eggs in one basket.
I think retirement can be a time to pursue a passion. Some folks work jobs they don’t like for many years. Someone who knows their passion can plan to use retirement to start a part-time business. WE need to have some part-time gigs that flow from interests. Brainstorming ways these interests can be used in the marketplace is a valuable investment.
Ken – That’s exactly where I was hoping to bring this post! We need to think more in terms of redirecting than outright retiring.
With the high cost of healthcare, which especially affects the elderly, as well as the near absence of defined benefit pension plans, only the very rich–those with many millions of dollars–will be able to afford an affluent retirement.
No, it is not nearly enough for most people because they return on safe investments it too low. It is actually less than inflation!
Besides that, in 25 years a million dollars will not have the value of $500,000 today. Maybe $200,000, $100,000 or less.
Everyone needs better strategies than saving in their 401k. Any form of passive income is a good source. Real estate, businesses, blogs, books and eBooks can be great sources.
One more round of proof – the sooner you focus on doing things for which you are passionate, the better. Live your life TODAY in alignment with your passions and values (the things that are most important to you). Why wait until you retire (if you’re lucky to make it that far) until you start living?
BTW – How difficult is it to have $1 million socked away? Only about 2.5% of Americans today have that. And yet (using a “safe withdrawal rate” of 4% as defined by the financial planning community), $1 million will generate about $40k per year (below the median family income in America of $50k). Talk about a disconnect. 2% of Americans have the income producing assets to generate the income that 50% of American families are used to.
Properly managed, a portfolio should be able to beat inflation by 3% with limited risk (safe enough for a person aged 65 expecting to live another 20 years). For younger folks, inflation plus 5% is a reasonable target rate of return but for every extra percent of increased target return, you double to quadruple the risk.
How do you get to place where you can thrive on a lower target rate of return? By focusing on your values (the things in life that are important to you) and making different choices not to blow money on stuff that isn’t all that important.
George – Inflation is the element not spoken of in all of those wonderful retirement projections that promise us millions if we faithfully invest. It may be the most important one, and that’s why it isn’t discussed.
John D – You hit the nail on the head, only 2.5% of the population have a million dollars; while going for it is a worthy goal, it’s best to be prepared to be one of the other 97.5% who don’t. Life won’t come to an end if you’re not a millionaire retiree, any more than it will be a golden road if you are. Once again, the inflation factor.
This isn’t to be negative, but rather to advise that salvation needs to be sought outside of and in addition to the hallowed 401k. And that’s good news for the vast marjority who don’t have a seven figure bankroll.
I think it’s better to focus on cashflow (income from all sources) rather than a sum total number/networth. It’s going to be your monthly cashflow anyway that determines how you live – so who cares if your cashflow comes from a $200,000 balance or a $1m balance? If you’re able to do some basic research you can find places paying higher interest and dividends no problem. Yes, you have to be somewhat on top of it to manage the risk, too – but it’s possible.
Sadly, $5 million is the new $1 million of years past. Got to love inflation, and the perpetual up up up desire for more money by all.
No, for many it won’t be.
But – to John’s point, the $50K median income. An individual with a $50K income will see a Social security benefit of about $21K at full retirement age. So. 80% replacement is $40K, only $19K needs to be replaced. It would take $475K to do this.
Social security benefits aren’t linear, as a replacement rate they diminish as your income goes up, but the lower wage earner has a good chunk of their retirement covered.
Financial Samurai – So right, $5 million is the new $1 million. What will the new $1 million be in 25 years? We can only speculate.
It’s back to Money Energy’s point that it will come down to cash flows, and they’ll need to come from different directions.
If inflation of the 70’s returns 1 million will be nothing.
Still wise investing will keep you ahead of inflation.
$5 million may be the new $1million, indeed… but $1m is still a nice stepping stone!:) I think the goal should be to make your monthly living expenses in passive income, while continuing to be able to invest on the side.
Good point! But it seems that given inflations ability to wear away current values, relying primarily or exclusively on a retirement portfolio may be insufficienct. Your earlier point about cash flows and passive income sources is where we all need to invest more time and effort.
I’m sure Social Security will make up the difference (LOL :))
I think we still have to try. What else is there to do?
As for what job will I have in retirement? Hmmm, that a good question! I would want to work someplace cool, Disney as a boat driver, or perhaps at McDonalds in Hawaii (like there is a McDonalds in Hawaii hehehe… Hey wait, there are 20 locations of McDonalds in Hawaii for real! You got to love google!).
When you get older, a lot of doors of opportunities are shut and locked for an older job seeker. So try to make lemons out of lemonaide by working in an area where you have always wanted to live 😉
Money Reasons?s last blog ..10 Millionaire Lifestyle Secrets
Money Reasons, I agree, we still have to try.
Your point about employment doors being closed to the elderly is a good one. That’s why I think long term preparation needs to be implemented, and independent business ideas pursued. It could take years to develop these, so planning in this direction is no less important than accumulating money for retirement.
There are so many variables that in order to plan wisely, we have to spread out our efforts. The world just isn’t a simple place anymore.
One sure method: lifestyle deflation. Getting more out of one’s money. I agree that a million is too little for the average family/consumer unit, but it is certainly more than enough for anyone not throwing money left and right.
ERE – Lifestyle Deflation – that’s a cool inversion of the increasingly popular Lifestyle Inflation. Everyone knows what lifestyle inflation is, but your spin tells us what we need to do about it.
I also agree, that it will be possible to have some form of retirement on a million dollars, but it won’t look at all like the TV version of retirement. That’s what will be the eye-opener for many faithful savers.
I could retire on this. I could live on under 30k/year… just the interest alone I could live off of without touching the principle. Of course, i’d probably have to leave the USA… everything here is expensive, overpriced… and taxes would eat up much of this money if you are not careful.
Arthur, you may be able to live on $1 million now, but would it still be enough 10 years into retirement, when the cost of living will undoubtedly be higher. That’s why we need multiple income sources even in retirement.
I’m afraid I’d have to disagree with inflation being completely out of control. Precious Metals do quite nicely to counter against that particular little problem. *Grin*
Equities also serve as a nice hedge against it… As dividends increase more rapidly than inflation does, which preserves cash flow.
You offer a solid point though. 1.2 million dollars might not be enough for some to retire. Personally, I’m more interested in generating cash flow in a more passive manner. I feel that’s a more sensible yardstick to a comfortable retirement.
It’s realy hard to know how much to save for retirement, there are so many factors involved.
My wife and I are 59/58 and plan on retiring at 63/62. Our retirement income will allow us to maintain or improve our current life style starting on approximately $87,000/year increasing our income every year by about $2,000. We currently have a 401/403 nest-egg of $900,000 with the expectation of having a total nest-egg , including savings and home of $1.3M at retirement. That said with pension income and SS we will only be tapping about 1.5% of our nest-egg to start off with. In summary one million is plenty for us to retire on and live in a great style if we choose to. Our combined household income when I was employed was about $125K/yr. Currently unemployed however wife is still employed.
Ludicrous. If we were to believe you then only a tiny fraction of people can retire. The math contains many errors including the historical rate of return (8%) in the market and then cherry picking inflation from recent data. Another major error is showing that inflation chews up 50% of your returns over 25 years so you only have half your investment. Note that carries someone to 90 which is very conservative for a lifetime estimate. By your math you have 1.2 MM when you retire but conservative estimates only allow for a 4% return. You then half that amount because of what is chewed up by inflation but that inflation occurs over 25 years. In year one even by your assumptions you have 4% of 1.2MM which is over $100 k / year. This allows further investment which isn’t accounted for. If I assume you mean the 25 years of inflation is from 40 to 65 instead of 65 to 90, then you have effectively assumed that inflation eats away at your savings/investments but does nothing for salaries or maximum IRA contributions over that time which is patently unrealistic. Look at minimum wage over a 25 year period. Finally and just as important as other factors is that there is nothing said about a house. Lets say you buy your house when you are 40 and lock in an interst rate. Now inflation is working for you as this is a fixed cost and your salary is inflating (not to mention likely growing in a real sense for at least 1/2 those years). Real inflation for the country is much higher than you will experience since a good portion of your expenses (mortgage payment) is fixed and will not inflate. If you are a renter then I agree this is real but in the example the person is max’ing out their 401k which I believe is more likely a person that either owns or has a mortgage on their house.
Mike – You’re already at the million dollar mark, and that’s plenty for now. The point of the post is that it probably won’t be nearly enough 20-30 years from now, no matter how impressive a sum it is now.
John – The fact is the number of millionaires currently in the US is only a single digit percentage of total households (somewhere between 3% and 8% depending on the criteria and who is supplying the numbers). It’s impirical then that most people won’t get there.
Also, worth considering is how many current millionaires got there via retirement plans; what ever number that is, it’s substantially below the number of millionaires in the country. We might only be talking 1-2% of households actually achieving a million dollar-plus retirement plan.
The majority will need to diversify income sources to live a reasonably comfortable lifestyle. More important, the point of the post is that all of the assumptions about easy to achieve seven figure retirement accounts rest on that historical 8% stock market return performing reliably (we know that it doesn’t–Exhibit A: the market from 2000 to present), as well as perfect world conditions.
I especially wouldn’t bet on that last one!
Hi Kevin, I think this is a very important set of points you bring up. Most people aren’t saving enough at all. I read that that most seniors have less than $136K in their retirement funds, so I guess they are going to depend on Social Security. Due to the $202 trillion in unfunded liabilities for SS and Medicare, this isn’t a good bet. They are already scrapping the cost of living adjustments.
I also agree with you that the retirement calculators are very optimistic about rate of return for stocks and real inflation. Add to this the fact that people are retiring earlier while living much longer, and you have a recipe for being destitute in your 80s.
I definitely plan to have multiple income streams throughout my life. Right now the winning investment IMO is precious metals, but that will change sometime this decade. My husband and I also have business investments, job income, and almost no debt. Eventually we will jump into the real estate market again, but I’ll give that a few years. I also like the idea of living in a cheaper country where my money goes farther.
Jennifer – All good ideas, in my opinion. Since we can’t know what the future holds, the best strategy is one comprised of multiple approaches–not at all unlike an investment portfolio.
I agree with you on precious metals. Any portfolio that isn’t diversified in a true sense could face serious problems. Stocks and bonds alone don’t offer the diversification most would like to believe, and often even move in tandem. That’s no diversification at all.
Also agree on real estate, when the time comes. In the meantime, caution!!!
It is impractical to consider living in another country when you retire because medicare only covers you if you live in the United State
Raven – You make an excellent point. Health coverage is a major retirement investment, and walking away from Medicare could be a stragegic mistake.
That being said, we have to wonder if Medicare will be worth sticking around for. It’s already in deficit and we can only speculate where it will be in 10, 20 or 30 years. My suspicion is that it will become something of a welfare plan, covering only minimal services, with the better coverage coming from private plans.
At that point, moving to another country that has a more affordable health system may be back on the table.
What you’ve identified is the true X factor in the retirement equation. It could render all other future projections moot.
Oh, for goodness sake! My dad passed away last year at the age of 94. He retired with virtually NO SAVINGS, he owned a very small house, received soc. sec., (as did my mother) and a very small pension. When he died he had been retired for more years then he had worked for Exxon (which was called Esso when he worked for them). My parents didn’t have an elaborate lifestyle, but they enjoyed their simple life and their family. Aim to retire with your home paid for, no debt, and as much as you can reasonably save. Do not spend your time worrying yourself into an early grave.
Dee – Exactly! Your parents lived comfortably in their later years not because they had a huge retirement nest egg, but because they could live within their means. The mindset today is that you build a massive retirement portfolio so that you can have a luxurious life. Most people won’t, and there’s a related implication that they’ll have a dreary life as a result. With some creative planning and a smart lifestyle, we can still be quite comfortable. BTW, I was a kid at the time, but yes, I remember “Esso”!
I had a different takeaway from Dee’s note – the main thing that stuck in my mind is that her dad had…A PENSION. My dad also has a pension, so he’s not having to blast through his retirement savings nestegg on “trivial” expenses like medical care and taking care of his house quite so fast. Pensions need to make a comeback in this country…they’re the only thing that has allowed secure and relatively worry-free retirement for MOST older people I know.
Hi Charlotte–Pensions are really the major difference between the retirees of 20 years ago and now. The ones who retired back then usually had pension. But those pensions have gone away for most workers today so we need to be prepared for a very different type of retirement.
You’re right, pensions need to come back, but the reality is that the probably won’t. That’s what this article is about!
Thanks for weighing in.
Great article Kevin. I worked in financial services for 4 and a half years and people were always astounded by the fact that they needed much more for retirement than they thought.
I agree we need to save money for our retirement but the sooner you can start the better. In fact I started at the age of 20. By saving for 40 to 45 years you can pay less in and enjoy the power of compound interest working in your favor.
One thing you did forget to mention was taxes. If you have just a 401k or IRA Uncle SAM will be asking for his share as well which could leave you with far less than the $600,000 you mentioned
I also believe in supplementing retirement income with an extra added income. For me blogging works great. I’ve been doing it for several years now and have been earning right around a $1000 a month. For me that’s pretty much equivalent to the $1.2 million number and if I can increase it the better off I’ll be.
Hi Chis–At a $1,000 a month, you’re right now where so many people will be in a few decades (although they’ll expect much more). But your example is exactly what I’m driving at by suggesting that we should be developing multiple income streams for retirement.
It’s not at all that we shouldn’t save for retirement, but more that fact that it will be much more complicated than we think and that will mean having a back up plan. This is especially true for most middle income workers, who may not be able to accumulate a million dollars or more by retirement.
Kevin, I would say depends on the life ine wishes to lead but very likely this is not going to be enough for much. We calculated that we need 2.5 million (and also the conditions under which this will be enough; assuming perfect money management meaning enough left for a decent funeral when gone :)). If you have five minutes check our calculator out – John did a prety decent job of it (including calculating the cost of care after the age of 80).
It is always impressive when a comment chain catches fire and goes on forever. It means you wrote a great post that touched nerves in a lot of readers. The fact is many people will have to greatly adjust their standard of living in retirement or learn serious frugality or both. However I’m not sure that working in retirement isn’t a positive for most people. I’m already early retired and well funded regardless of the worst case market scenarios. Yet I choose to work part time for money I can’t possibly ever spend because I’m convinced that I need the mental and social contact and the structure it enforces on my life. In a strange way being underfunded may actually add years to some people’s lives?
Hi Steve – I think you’re hitting on the “you retire, you expire” concept. There’s some real legitimacy to that, from what I’ve seen. I’ve seen people work into their 70s and 80s and enjoy life to the very end. I’ve also seen people retire – in their 60s usually – and end up dying anywhere from a few weeks to a couple of years later.
I don’t think they necessarily die because they aren’t working per se, but maybe more because they lost purpose in life??? Anything’s possible. I’m not coming down on the concept of retirement, but more pointing out that it’s neither as certain nor as neat as people believe (or are led to believe). That doesn’t mean life will suck either, but rather that we should all be ready for whatever happens and not just assume the usual “and they all lived happily ever after.” Especially given how long people are living theses days.
My husband and I are 57/58, did reach the $1 mil mark and paid off a home. We stopped full time work last month and, although we are more fortunate than \most, it’s still scary. Neither of us will get a government or any pension. If we live into our 90’s, the money must last. So, we’re both starting new digital business in areas we’re passionate about. I suggest everyone think of themselves as a coach. What skill could you coach people about for the rest of your life? And then start a website on that area. Dovetails nice with the wisdom of aging too.
Good on you and your husband JWB! I suspect that the same wisdom that saw you accumulate $1 million and paying off your home is also driving your decision to start digital businesses. And you’re right on target in doing just that. At your ages, you may need to provide for yourselves for the next 40 years. A lot can happen in four decades, and you need to be ready for whatever happens. Just look at all that’s happened in the last 40 years – three stock market crashes, the Dot-com bust, the Financial Meltdown, and now a growing healthcare crisis. Having some sort of earned income, at least until you’re eligible for Social Security and Medicare is an excellent strategy.
I also think, in general, that the whole idea of retirement is way overblown. Retirement should be more about reshuffling the deck and maybe down-shifting into a more comfortable life. You may want to leave your current job or career, but there’s nothing wrong (and a whole lot right) about going into a new venture. You and your husband are at an age where you still have a lot to give. It’s even possible that your best days are ahead of you, especially since you’re free of a lot of the financial pressures earlier in life. That can enable you both to blossom like never before.
We’re never guaranteed of anything in life, and not even life itself. But the two of you are on a strong track, and it seems to me that your survival instincts are are driving your fears. That’s not an unhealthy outlook either. Those instincts have served you well so far, and it looks like they are again.