Retirement Can Be Expensive
It seems that whenever I hear a discussion of wealth involving millions, someone is likely to remark that $1 million just isn’t what it used to be, as if we all have a drawer in the kitchen next to the placemats with $1 million in it right now.
Even in the United States, the vast majority of households don’t have a net worth of $1 million. While there are countries with higher average incomes than the U.S., there is no country on the planet where average wealth approaches $1 million.[i]
Wealth, in this context refers to your net worth or your total assets minus your total liabilities—what you own minus what you owe.
What does $1 million buy?
You could spend a little more than two weeks in the Royal Penthouse Suite in the President Wilson Hotel in Geneva[iv] or you could spend almost 10,000 weeks (about 183 years) in the Lucky Star 2 Hotel in Phnom Penh, Cambodia where I stayed three weeks ago.
As you can see, $1 million will either buy a great deal, or very little, depending upon how you choose to spend it. For the average American, $1 million of savings and investments in addition to owning a home without a mortgage, can provide for a comfortable retirement.
Who needs $1 million?
Setting aside existential discussions about the nature of “need,” most of us will need that much to retire. That is neither shocking nor scary to anyone who has yet to celebrate a birthday involving over-the-hill jokes and black balloons, but for those who’ve been celebrating birthdays with enough candles to create a fire hazard, this is scary. Most people in their fifties do not have nearly enough money saved to be on track for a comfortable retirement. And for the younger set, inflation will continue chipping away at the value of the dollar, meaning that you’ll want to save much more than a $1 million to have the same lifestyle that nest egg would provide today.
As Latter-day Saints, members of the Church of Jesus Christ of Latter-day Saints, we have two significant retirement goals. The first is to be self-reliant. We don’t want to be a burden to our children, to the state or to the Church. Second, we want to have the flexibility to serve a mission (or two or three…) and that also requires careful financial planning.
A bit of good news for those with the discipline to live a modest lifestyle, modest savings will go a lot farther for you. For the rest of us, however, our challenge is to bring our savings plan in line with our spending plan.
How does one get $1 million?
There is only one sure way to have $1 million in your bank account and that is to put that much into it. The fact is, however, with interest rates painfully low—adjusted for inflation, real returns on bank deposits are negative—most of us will choose to build our retirement savings with a wider and more diverse basket of investments that have greater risk of principal loss but that will have expected returns well above inflation.
In plain and simple terms, we’ll be investing in stocks and bonds and real estate, much of it through mutual funds and REITS (real estate investment trusts that trade on the stock market). These investments carry risks that are sometimes difficult to understand, so it is wise to get the advice of professionals—including someone like an accountant who won’t make money off of your investments.
Such professionals can also help you fine-tune your goals so that you are really saving enough to have the lifestyle you want during retirement. If you have a higher income household and want to maintain your current lifestyle, you will likely need more than the average for retirement.
If you have 20 years until retirement and haven’t started yet, you may think you have plenty of time. To accumulate $1 million in investments, however, you’ll need to be contributing almost $1,800 per month for the next twenty years in order to have a nest egg worth $1 million. Even if you have 30 years, you’ll still need to be saving $738 each month to reach that benchmark, but you may need much more than $1 million by the time you retire. (My calculations assume you’ll average a return of 7.5% over this period, which is by no means certain.)
If these numbers scare you, be sure to sit down with a trusted advisor soon to develop a plan to build for your retirement.