Will You Be Able to Retire on $1 Million?
There used to be a time, in the not-to-distant past, that $1 million was considered a pretty good nest egg. This is no longer the case. I've lost count of the articles and blog posts I've seen in the last year, questioning whether or not $1 million will be enough to retire on. The main culprit, of course, is inflation. Inflation is eroding the value of that $1 million nest egg; as the years march forward, there is a very real possibility that you will need much more than a $1 million nest egg to live the lifestyle you want.
Inflation: $1 Million Isn't What It Used To Be
Inflation represents a decline in purchasing power. Think about what you could get with $1 when you were a kid. A buck seemed like a lot to me. My son, on the other hand, is less impressed with $1. That's because he knows from experience how hard it is to buy something he wants at the store for $1. You can't even get a king sized candy bar in the checkout line for $1. The decline of your dollar's value will affect your ability to live in comfort during retirement. I used an inflation calculator to figure out the changes in buying power between 1980 and 2010. What cost $1 million in 1980 costs $2.6 million now. That's a big difference, especially when you consider that the time period only spans 20 years. That means, in 1980, if you bought the exact same products as you buy now, you would only have paid $342,827 for what costs $1 million today. What if inflation continues to have a similar effect over the next 20 years? Will $1 million act as an adequate nest egg? If you accept and follow the rule of thumb that says withdrawing 4% of your retirement savings will allow your funds to last at least 25 years (excluding Social Security), a $1 million nest egg would provide you with $40,000 a year. Could you live on $40,000 a year during retirement? Keep in mind that this represents $3,333 a month. For most people, in order to make this work, a $1 million retirement nest egg will require few other financial moves to qualify as a comfortable retirement:
- No debt. No credit card debt and no car loans. This also includes mortgage debt, which when you are living on $40,000 a year, is a real budget buster.
- Good health. Do what you can now to live healthy. Health care costs increase with age, and if you are in poor health when you retire, that $1 million isn't going to go very far.
- Careful choice of location: Even without debt, and with good health, some people might be hard-pressed to make it on $40,000 a year because of their location. High-priced areas can quickly deplete your savings.
- Possible downsizing: Even now, many retirees find it necessary to downsize in order to meet their costs. You would need $104,443.81 now to live the same lifestyle $40,000 purchased in 1980. So, if your current lifestyle calls for $50,000 now, how will $40,000 be enough for you in the future if you don't downsize?
Beating Inflation: Stretching that $1 Million
Regardless of whether you think $1 million is enough, or if you believe you can get by with less, the one thing we can all agree upon is that inflation works against us when it comes to our retirement funds. In the end, how you manage to beat inflation will have a great bearing on your ability to live comfortably into your retirement years. Of course, wise investments, such as certain stocks, bonds and commodities, that grow faster than inflation can help. Here are three other simple strategies that can help ensure a quality retirement:
- Moderate your wants: Finding contentment with less, and reducing your need to consume, can go a long way toward helping you live on any income. Inflation doesn't have as big an impact if you aren't buying a bunch of stuff you don't need. The less you buy, the less you have to deal with inflated prices. Consider what would make you happy, and consider where you could live for less. Your ability to be content could influence your relative affluence in retirement.
- Work longer: Perhaps you decide to work longer. Delaying retirement by three to seven years can help you save your nest egg so that it's there when you need. If you don't want to delay retirement altogether, you might consider semi-retirement, working part-time initially so that you don't have to rely so much on your nest egg.
- Cultivate passive income: Another strategy is to cultivate passive income. When you have diversified income streams, you will not need to rely as heavily on a huge nest egg. Passive income, in the form of dividend stocks and other income investments, or from a monetized web site or other side business, can help you stay on top of inflation while not requiring much daily effort on your part.
Final Word
The truth is that $1 million just doesn't go as far as it used to. And there is no doubt that $1 million will buy even less in the future. Studies repeatedly show that most Americans aren't saving enough for retirement -- and that's with a $1 million target. What happens as inflation continues to take its toll? You should begin now to plan how you will beat inflation in your own financial future and into your retirement years.
