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?