How can you plan to do
it? What kind of financial commitment will it take?
How many of us will
retire with $1 million or more in savings? More of us ought to – in fact, more of us may need to,
given inflation and the rising cost of health care.
Sadly,
few pre-retirees have accumulated that much. A 2015 Government Accountability
Office analysis found that the average American aged 55-64 had just $104,000 in
retirement money. A 2016 GoBankingRates survey determined that only 13% of
Americans had retirement savings of $300,000 or more.1,2
A
$100,000 or $300,000 retirement fund might be acceptable if our retirements
lasted less than a decade, as was the case for some of our parents. As many of
us may live into our eighties and nineties, we may need $1 million or more in
savings to avoid financial despair in our old age.
The earlier you begin
saving, the more you can take advantage of compound interest. A 25-year-old who directs $405 a
month into a tax-advantaged retirement account yielding an average of 7%
annually will wind up with $1 million at age 65. Perhaps $405 a month sounds
like a lot to devote to this objective, but it only gets harder if you wait. At
the same rate of return, a 30-year-old would need to contribute $585 per month
to the same retirement account to generate $1 million by age 65.3
The
Census Bureau says that the median household income in this country is $53,657.
A 45-year-old couple earning that much annually would need to hoard every cent
they made for 19 years (and pay no income tax) to end up with $1 million at age
64, absent of investments. So, investing may come to be an important part of
your retirement plan.4
What if you are over
40, what then? You
still have a chance to retire with $1 million or more, but you must make a
bigger present-day financial commitment to that goal than someone younger.
At
age 45, you will need to save around $1,317 per month in a tax-advantaged
retirement account yielding 10% annually to have $1 million in 20 years. If the
account returns just 6% annually, then you would need to direct approximately
$2,164 a month into it.4
What
if you start trying to build that $1 million retirement fund at age 50? If your
retirement account earns a solid 10% per year, you would still need to put
around $2,413 a month into it; at a 6% yearly return, the target contribution
becomes about $3,439 a month.4
This math
may be startling, but it is also hard to argue with. If you are between age
55-65 and have about $100,000 in retirement savings, you may be hard-pressed to
adequately finance your future. There are three basic ways to respond to this
dilemma. You can choose to live on Social Security, plus the principal and
yield from your retirement fund, and risk running out of money within several
years (or sooner). Alternately, you can cut your expenses way down – share
housing, share or forgo a car, etc., which could preserve more of your money.
Or, you could try to work longer, giving your invested retirement savings a
chance for additional growth, and explore ways to create new income
streams.
How long
will a million-dollar retirement fund last? If it is completely uninvested, you could
draw down about $35,000 a year from it for 28 years. The upside here is that your invested retirement assets could grow
and compound notably during your “second act” to help offset the ongoing
withdrawals. The downside is that you will have to contend with inflation and,
potentially, major healthcare expenses, which could reduce your savings faster
than you anticipate.
So, while $1 million may sound like a huge
amount of money to amass for retirement, it really is not – certainly not for a
retirement beginning twenty or thirty years from now. Having $2 million or $3
million on hand would be preferable.
For Blue Springs retirement planning contact Mike today at 816-220-2001.
Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com
Citations.
1 - investopedia.com/articles/personal-finance/011216/average-retirement-savings-age-2016.asp
[12/8/16]
2 - time.com/money/4258451/retirement-savings-survey/
[3/14/16]
3 - interest.com/retirement-planning/news/how-to-save-1-million-for-retirement/
[12/12/16]
4 - reviewjournal.com/business/money/how-realistically-save-1-million-retirement
[5/20/16]
