How Much Money You Need to Save to Retire a “Millionaire”
How much money are you saving and investing each month? Do you know what you’re on pace to have in the future? Many of the people I talk to have a goal to “retire a millionaire”. But what does it really take to do that? Surprisingly it’s not as hard as you would think. It just takes time, commitment, and the discipline to spend less than you make and invest enough to get there.
Something that was very interesting to me when I started working with retirees was just how much a person spends over a 30-year retirement. When you account for inflation, more free time to take vacations, and no other source of income except retirement savings, that nest egg can start to decline quickly.
So the question is, how much does retiring with $1 million get you?
Well, a decent estimate is that you can withdraw about 4% of your nest egg in retirement and never run out of money, provided you are invested properly. So with $1 million saved, you can live on about $40,000 per year adjusted for inflation each year. Add in Social security of about $20,000 for each spouse, which brings the total to about $80,000 per year. Which, depending on your expenses, is pretty good! Don’t think you and your spouse can live on $80,000 each year? Better get to saving and saving a lot. So let’s take a look at what it’s going to take depending on your age.
Before we start, we all know that $40,000 today is not going to be worth the same in 20 years thanks to inflation. So let’s adjust that $1 million number for inflation for each of our situations. We’ll use a 3% inflation rate over this period of time.
Age 25 - $2,985,226
Age 35 - $2,221,289
Age 45 - $1,652,847
Now that we have our benchmarks, let’s see how much it’s going to take to get there for our different scenarios. We’ll assume an 8% annual return for each scenario.
Here’s how much each situation must save to reach their goal by the time they turn 62.
Age 25
With $0 saved - $1,098 per month
With $25k saved - $923 per month
With $50k saved - $747 per month
Age 35
With $0 saved - $1,946 per month
With $100k saved - $1,191 per month
With $200k saved - $437 per month
Age 45
With $0 saved - $3,827 per month
With $150k saved - $2,480 per month
With $500k saved - $663 per month
What you’ll notice from these scenarios is that after you have amassed a large nest egg, saving becomes way less important. This is because, at this point, your nominal return starts to eclipse what you were saving. For example, 10% growth on a $1,000 account is $100, far less than what the individual is saving per year. However, 10% growth on $250,000 is $25,000 probably far more than what the average person can save per year. This is why it is so important to get as much money into the market as quickly as you can. If you jumpstart your savings you can potentially even reduce contributions later, depending on your goals.
So, are you saving enough? Do you think you’re on pace to reach your financial goals? Personal finance can be intimidating but in reality, it’s just a big math problem.
If you need help getting started, schedule a meeting. I’d be happy to help.
Will
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
No strategy assures success or protects against loss.