Investing for retirement is a daunting task. You’ll need a massive amount of money to provide a reasonably safe income for your golden years. Unfortunately, many people never factor in one of the largest threats to their retirement safety.
Retirement’s Massive Goal
The massive goal most people consider when it comes to their retirement is stockpiling enough assets to reach their retirement number. Your retirement number is the amount of financial assets a person will need to have in order to provide a reasonable income to live off of in their retirement.
To calculate how much money you’ll need, using the commonly cited 4% rule, simply take what you expect to be you’re yearly expenses in retirement and multiply by 25. (Note: This is just a simple calculation and you should put much more effort into your retirement plan.) These numbers are often huge and can easily exceed $1,000,000. Due to the enormity of these numbers, many people simply stop there and leave out some of the most important factors to retirement planning.
Just for fun, here are a couple quick examples of how to calculate a retirement number. If you think your expenses will be $40,000 a year, you simply multiple by 25 to get a $1,000,000 retirement number. Think you’ll need $100,000 a year? Your retirement number will be $2,500,000. The key, that many people forget to factor in, can absolutely destroy your retirement. That threat is inflation.
Inflation – The Destroyer Of Retirements Everywhere
The problem many people forget to include in their calculation of the 4% rule is that you must account for inflation when you come up with your yearly expense number. Instead, most people simply consider how much money they’d need in today’s dollars and calculate their retirement number based off of today’s dollars. This could leave you in a horrible position.
Most people forget to factor in inflation because it isn’t a huge factor in our every day lives. Inflation hasn’t been very high recently and we don’t tend to notice it in our every day lives. However, if you think hard about how much something cost 10, 20 or 40 years ago, you’ll notice there is a HUGE difference in price between now an then.
So, let’s say I do want to retire on $40,000 a year in expenses in today’s dollars, but I don’t want to retire until 40 years from now. In order to reach $1,000,000 in today’s dollars, I’ll actually need $3,959,260 in future dollars to have the same spending power, assuming a 3.5% inflation rate. Isn’t that insane!
Now that I know I’d need to end up with almost $4,000,000 instead of just $1,000,000 to retire in 40 years, that definitely changes how much money I’ll be putting away for retirement. Instead of having to invest roughly $284 a month at an 8% return to reach $1,000,000 when I retire in 40 years, I’d have to invest roughly $1,135 a month at the same 8% return to acheive the $4,000,000 goal when I retire in 40 years. If that isn’t an eye opener on how inflation can destroy your retirement, I don’t know what is.
Alternatively, if you only end up with $1,000,000 in 40 years, it will only have 25% of the purchasing power it would have today. Wouldn’t it stink to live in retirement on the equivalent of $10,000 a year? That’s insanely frugal if you ask me!
Please don’t fall into the common trap that so many others do when calculating their retirement number. Factor in inflation and make sure to check whether or not you’re on track with your retirement at least once a year. Your expenses could change drastically or inflation could differ dramatically from your predictions. While most people tend to think that these numbers will only get worse, there is a possibility they will change in your favor! Don’t dread your annual check up, it might give you some good news!
Do you have a retirement number you’re aiming for? Did you forget to account for inflation in that calculation? Let me know in the comments below! I love hearing about retirement planning!
Photo by: Emutold Text added by: Lance Cothern