For the purposes of this article, I’m assuming you only want to rely on income from your investments to fund your retirement. That means no social security, no pensions or no other outside income.
I’m sure you constantly see articles about retirement and how to save $1,000,000 by the time you retire.
They make it seem like $1,000,000 will be enough to live on for your whole retirement, no matter what age you are today.
The Reality – $1,000,000 Isn’t Enough
Unfortunately, the facts for many people are much different.
Unless you’re planning on retiring today and living on $40,000 a year or less, having just $1,000,000 in retirement savings won’t likely get you through retirement.
Whenever you see these articles, they always state if you start investing at age 25 you only need to invest something like $322 a month at an 8% return to get $1,000,000 by the time you retire at 65. However, you would need to invest $736 a month if you wait until 35, which is over twice as much.
These facts are true and they’re a great example of how important investing early is in relation to compounding returns. It really drives the point home that you need to start investing as young as possible to get the most out of your money.
The problem with these articles is they aren’t telling you to invest enough. They lure you to believe that $1,000,000 is all you need.
Inflation Will Wreck Your Retirement Plans
Sadly, it’s too late to take advantage of compounding when you find out you need more. Depending on how much income you’ll need, you could require anywhere from $2,000,000 to $7,000,000 or more when you retire. It is even harder to hit those marks when you’re already 20 years into your plan and behind when it comes to your current savings.
If you’re 25 today and want to live on $40,000 a year in today’s money, you’ll need a lot more than $1,000,000 when you retire. Why? Inflation.
If inflation averages 3.5% a year (a historical average), then you’ll actually need $3,959,250 to satisfy the 4% rule and live off of $158,370 a year (today’s equivalent of $40,000 a year). Shocking how much 3.5% inflation can change things, eh?
In order to reach the goal of $3,959,250, you’ll need to invest much more than the amount you’d need to get to the big round $1,000,000 number. In fact, if you start at 25, earn an 8% return and inflation is 3.5% (that’s a lot of assumptions), you’ll need to invest $1,274 a month in order to live off of that $40,000 in today’s dollars when you retire.
No Longer Young? It’s A Scary Future
Things get worse if you’re 25 today and you decide to wait until 35 to start investing. If that was the case, you would need to invest $2,913 a month to reach that same goal. If that isn’t a wakeup call, I don’t know what is. You never hear this side of things in the mainstream media.
Assumptions Cannot Be Relied On
The other thing you never hear the big news articles discussing is all of the assumptions they make. The two big assumptions, investment returns and inflation rates, can vary wildly in the future just as they have in the past.
In 1980 inflation was 13.58%! If that happened for a prolonged period of time, you’d have to adjust your plan quickly and invest a ton more to make sure you hit your goal of $40,000 of inflation adjusted income when you retire.
In the 2010, the S&P 500 10 year annualized returns were only 1.41%! Again, that is a huge departure from our 8% assumption. If that happened for a long period of time in the future, you’d have to make adjustments to your plan.
Get Started Today No Matter How Small Your Contributions Are
Planning for retirement income is no easy task. It is extremely important you get started early because the future isn’t certain. It is that uncertainty that you need to get ahead of.
If you haven’t started investing yet, start investing today. It doesn’t matter if you can’t hit your ideal monthly retirement savings goals today. Start with something and work your way up to get to that level. You’ll be amazed how much easier it is to work toward your goal when you actually start working on it.
What do you think about the media’s emphasis on the magical $1,000,000 number? Is it time we accept that we need more than $1,000,000 to retire?
Note: I do think Social Security will be around in some form when I eventually retire decades from now, but it won’t be anything like it is today. That’s why I don’t rely on it in my retirement planning, if it is there when I retire, it will be icing on the cake.