Jonathan Clements: A Million No Longer Buys You a Luxe Retirement

June 28, 2007

Check out today’s Jonathan Clements’ Getting Going column titled A Cool Million No Longer Buys You a Luxe Retirement. I think most of us already know this. However, it amazes me how many magazines write about becoming a millionaire. I guess it’s because the word “millionaire” still has a nice ring to it. All I can say is that if you are in your 20s, 30s, or 40s and $1 million is your goal for retirement, you’re not going to be happy.



Take a look at the graphic below which shows the future purchasing power of $1,000,000 based on three modest inflation rates.

The Future Value of $1,000,000

My point? Don’t make $1 million your goal. Instead, base your goal on what you will need after inflation. For instance, if you think $1 million in today’s dollars would make a nice retirement, but you won’t be retiring for 30 years, you’ll need to adjust your goal for inflation. Using the same inflation rates as the above example, I put together a chart to show you how much you will need to have the equivalent of $1 million in today’s dollars:

Adjusting $1,000,000 for Inflation

Bottom line: if your retirement is 20 years away and your goal is to have $1 million in today’s dollars, you better make $2 million your goal.

The article also talks about the fact that yields on fixed income investments (those that are considered “safe”) are low, which makes it difficult for a portfolio to produce income. There’s ways around this but not without taking on some risk. I’ll address this issue further in a future post.

10 responses to Jonathan Clements: A Million No Longer Buys You a Luxe Retirement

  1. Ouch! But these numbers don’t lie, and those of us who have quite a few years before retirement really need to keep the power of compounded inflation in mind. I look forward to your suggestions on ways around low returns on safe investments.

  2. Rather than a specific dollar goal, I suggest measuring your progress in terms of years of annual income. If you estimate that you will need 75% of your preretirement income and that you can take 4% distributions, use 15 to 18 times your annual income as your goal. You have reached milestones when you accumulate investments equal to 1, 2, 5, and 10 years of annual income. You can fine tune the number as you get closer to retirement age.

  3. Dave has a good point. Personally, I am about 30 years away from retirement, so I don’t have a clear cut ‘number’ in mind. I also don’t know if 75% is the right number, but it sounds reasonable.

    I’ve known for awhile that my wife and I will need more than $1M to retire, but I am fine with that. I am still going toward the goal of $1M though, because as you said, it has a nice ring to it. 🙂

  4. Because of the dramatic impact of inflation especially if you expect to be retired for many years the best advice I’ve received on this topic is plan to save a $1 for every $1 you think you’ll need to spend in retirement.

    If you adopt this mindset you almost certainly will be able to retire comfortably or at least without a major lifestyle adjustment

  5. I agree $1 million is not enough to live “comfortably” for an extended period of time. I had always targeted $2 million as a goal for retirement in about 20 years. However the article also makes an important point in that you don’t live forever and you can’t take it with you, so there is no reason not to touch the principal balance. Since you could outlive your own expectation, I wouldn’t recommend planning to spend everything (and most people want to leave something for their heirs).

    My plan that I have spreadsheeted is to target spending about half of the $2 million over a fairly long but realistic 30 or 35 year time period (in addition to the income from the balance). Using assumptions of a 5% return and 3% inflation, this would allow me to withdraw $6600 per month INCREASING OVER TIME FOR INFLATION and be left with $1 million after 30 years. By increasing in time for inflation, I mean that it wouldn’t be a flat $6600 every month, but a little more than that each month so that my net earning power would remain $6600 per month, or about $80,000 per year (i.e. I would be drawing about $9000 per month in 10 years). This doesn’t factor in taxes and social security. I am pretty comfortable with this plan. The only catch of course is getting that $2 million 🙂

  6. The thing most people don’t account for in retirement planning is the extraordinary power of compounding inflation.

    If your target retirement income is $50K/yr in today’s dollars and you plan to retire in 20 years, you’ll need an income of $90K in your 1st year of retirement (PV=50K, I=3% inflation rate, n=20 yrs).

    But, of course, it doesn’t stop there because for each year of retirement, you’ll need to draw increasing amounts to keep up with inflation. After 20 years of retirement, you’ll need income of $162K to maintain the same purchasing power.

    I find that assumptions for timing, like when you’ll retire and when you’ll die (or last to die), plus assumptions for inflation and investment returns vastly affect the calculation of how much you’ll need.

    If you figure these things conservatively, you end up with results that suggest you’ll need millions of dollars. But if you calc it too simplistically, there are all kinds of variables (like future tax rates), you end up ignoring critical items.

    I’ve concluded there is no fool-proof way to go about it. Reality is that we are going to have to count on a whole lot of uncertainty about our future and retirement. And reality is that most people will end up relying on family to help bridge the gap in some way, shape or form. And as much as I think people should be as prepared as possible, there is no avoiding the role of fate – some of us will be fortunate in our health, investing, planning, etc. and some of us won’t be, no matter how diligently we try.

    So, my strategy is to try to leave as many future options open as possible – flexibility to work as long as possible, and save as much as possible, as well as contingency just in case it doesn’t work out the way I envision it will.

  7. BTW, Wife and I don’t plan on leaving anything to anyone (charity being the exception), unless we suffer an early demise. We hope to be as generous as we can be during our lives, helping the kids with education and other headstart things, and spend every penny.

  8. I did the calculation I’ll need about $5-6M to retire with 100% income replacement. I’d like to travel, help the kids, etc. I’d also like to not worry about money.

  9. Like “Livingalmostlarge” I’ve run the numbers and will need about $5M to $6M to retire with 90% income replacement in 30 years.

  10. Shoot I want about $100M