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What Kind of Millionaire Do You Want To Be?
By JLP | December 21, 2006
The January issue of Money has a section about reaching various goals. They (Money Magazine) took a poll to find out what sorts of goals people had set for themselves. One of those goals was “…to become a millionaire.” In that section, they have a little chart that shows how much you need to save each month based on your current age in order to become a millionaire by age 60. Their graphic looks something like this (I added the “20″ column and a 12% and 10% ROR category):
The problem with this is that they are ignoring inflation. If inflation runs at modest 3% per year, $1,000,000 will only be worth $543,794 in 20 years and only $295,712 if you go out 40 years. So, although you will be able to call yourself a “millionaire,” you will only have the purchasing power of half a millionaire.
What kind of millionaire do you want to be? A millionaire in name only or a millionaire in purchasing power? If you want to be a millionaire in purchasing power, you’re going to have to save more money. How much more? Let’s see.
I took Money’s numbers and adjusted them to reflect inflation. For illustrative purposes, I put together three graphics to reflect three different levels of inflation: 3%, 3.5%, and 4%.
As you can see, the numbers are quite a bit different from the numbers Money gives us. If you are currently 40 and you want to be a true millionaire by age 60, you will need to save $3,066 per month (or $1,368 more per month than Money’s example), assuming an 8% return and a 3% inflation rate. It’s not nearly as much if you can get a higher rate of return. HOWEVER, trying to get a higher rate of return includes taking on more risk and there’s also no guarantee that you’ll get that return.
So, what’s a person to do? Start saving, and start saving now. Don’t put it off. If you are in your 20s and are reading this post, thank God that you are young enough to have time on your side. Don’t waste it. The sooner you start saving, the less you have to save.
Topics: Investing, Retirement Planning |