Offered by T. Lloyd Worth
How many of us will retire with $1M or more in savings? More ought to – in fact, more may need to given inflation and rising health care costs. A 2015 Government Accountability Office analysis found 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 we live longer, we may need $1M 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 directing $405 a month into a tax advantaged retirement account yielding an average of 7% annually will wind up with $1M at age 65. $405/month may sound like a lot to save, but it only gets harder if you wait. At the same rate of return, a 30-year-old would need to contribute $585/month to the same retirement account to generate $1M by age 65.³ (According to the Census Bureau the median US household income is $53,657. A 45-year-old couple earning that annually would need to hoard every cent for 19 years (and pay no income tax) to end up with $1M at age 64.)⁴
If you are over 40? You still have a chance to retire with $1M or more with a bigger financial commitment. At 45, you will need to save around $1,317 per month in a tax-advantaged retirement account yielding 10% annually to have $1M in 20 years. If the account returns just 6% annually, you would need to direct approximately $2,164 a month into it.⁴
What if you start trying to build that $1M retirement fund at age 50? Earning 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 55-65 with $100,000 in retirement savings, you may be hard-pressed to adequately finance your future. There are three basic responses to this dilemma
1) choose to live on Social Security, plus principal and yield from your retirement fund, and risk running out within several years;
2) cut expenses way down; or
3) work longer, allowing invested retirement savings a chance for additional growth, while exploring new income streams.
How long will a million-dollar retirement fund last? If completely uninvested, you could draw down about $35,000 a year for 28 years. The upside—invested retirement assets could grow and compound to help off set withdrawals. The downside–contending with inflation and, potentially, major healthcare expenses 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 isn’t. Call me at (303) 558-0214 for questions about retirement strategies.
¹ investopedia.com/articles/personal-finance/011216/average-retirement-savingsage-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]
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