May 13, 2014

Why $1,000,000 is Not Nearly Enough (for retirement)

$1,000,000 is Limp

A million bucks will last for about 10 years of retirement.

With inflation, one million dollars in the year 2040 will be worth $400K in today's dollars.  $40K a year for 10 years, then the tank's sucking fumes.

I think most of us will need at least $2.5 million in savings by the time we're riding Rascals.

$2.5 million / 30 years retirement = $83,000 per year ($40K inflation adjusted)

Many of us will croak before 30 years of bingo, and some may get lucky and receive a social security or pension stipend.  Taxes vacuum some out of the coffer.  So the numbers are nebulous.  But better to have leftover $ than run dry when it's time to touch up your blue bouffant.


Fuzzy Math
Last post said most of us will make a million in our lifetime.  But we'll need well over the Big M. saved up by the time we stop commuting.  How is this going to happen?

Compound interest.  And the lottery.

You can double your bounty every 8 years pretty easily.  A compound interest calculator tells me $50,000 invested with a 9% annual return becomes:

- $100,000 in 8 years
- $200,000 in 16 years
- $400,000 after 24 years

To reach $2.5 million by retirement, I need to put away $520 a month for 40 years, with a 10% annual return.  Total out-of-pocket spend is $250,000.

If the return increases to 12% annually, monthly amount to save drops to $330, and total spend is $165,000.  Compound interest is a beast, in a good way.

My preferred weapon is individual stocks.  Wrote a whole set on that, but unsure if anyone read 'em.

How Much Will You Need?
It's difficult to predict how much booty we should set aside by the time we're old and in diapers.

What do you think...how much will you need, and why?  How are you filling the wrinkly pot?

-Beard

10 comments:

  1. Good Lord, it's sort of depressing to even think about it. ESPECIALLY when we have three kids and aren't regularly putting away Jack squat.

    ReplyDelete
    Replies
    1. Some is better than none, and there's always the van down by the river for option B.

      http://www.youtube.com/watch?v=3nhgfjrKi0o

      Delete
  2. Shannon5/14/2014

    Don't be depressed, just get after it. I have heard some FRIGHTENING statistics about our generation's lack of retirement savings. Social Security - don't count on it, folks. Get to saving. Agreed with Beard, some is better than none - this is not a "head in the sand" kind of situation. Call your payroll department, get with your benefits administrator, do whatever you need to do to get moving.

    ReplyDelete
  3. How is this amount figured? Obviously there are costs like food and clothing to account for but is this assuming you'll also need money for housing and lots of cash for fun stuff? If a person has a modest house that's paid for and doesn't habitually do expensive activities (like eating out and frequenting golf clubs) 2.5 million seems like an awful lot.

    ReplyDelete
    Replies
    1. Assuming no house payment and simple living:

      No house payment, no social security or pension (never assume entitlements will be there in 30 yrs):

      $2.5 million starting pot

      Subtract taxes (15%) and inflation (50%)

      Leaves you with $1 million

      $1 million divided by 30 years of retirement = $33K per year

      Healthcare (insurance, medicine, legs replaced) - $15k per year
      Household expenses – food, car and house insurance, utilities, new pants - $15K per year
      Property tax - $4K per year

      And we're already over budget.

      Most of us will only live 20 or 25 years into retirement (which means we'll need less $), and perhaps we will receive some social security or pension. But it's dangerous to assume so.

      Delete
  4. Anonymous5/14/2014

    I'm not counting on "early death" to fix the math problem. Save more, spend less, live long.

    ReplyDelete
    Replies
    1. All that, plus spend enough when young to enjoy the days of our youth.

      Delete
  5. Anonymous5/15/2014

    You need to make your money work for you in a way that income it generates tracks the inflation. Example is a rental property. As inflation goes up, rent will adjust too accordingly. You of course have to do the math that by the time you retire the rental prop is paid off (from the rent it generates all your working years).

    ReplyDelete
    Replies
    1. Rental you got to babysit and make sure tenants don't throw poop on the ceiling. Other than that, sounds solid.

      Delete
  6. I'm sure this number catches a lot of people off guard. There are numerous free retirement calculators online people should check out & use f they've never calculated what they need to save.

    ReplyDelete

Thanks for the note, check back for my response!