Retirement savings: Will $4 million be enough?
Posted: February 2, 2012 at 9:43 pm
I hope to have $4 million saved by the time I retire in 30 years. That sounds like a lot of money, but how much would that be in today's dollars? -- Brian
It would seem as if $4 million should be enough to fund a comfy retirement 30 years from now. But you're right not to assume it will be sufficient.
One key issue is the purchasing power of future dollars versus today's dollars. Most people are not accustomed to thinking of money in real, or inflation-adjusted, terms. They use a calculator, plug in the amount they plan to invest for the next 10, 20 or 30 years, throw in a rate of return (often too high) and come away with a big six- or seven-figure projected nest egg that they think shows they'll have it made in the shade in retirement.
But psychologists and behavioral economists are familiar with our tendency to overestimate the value of future dollars. They even have a name for this phenomenon: money illusion.
Four million bucks does sound like a lot of money -- and it still will be even 30 years from now. But it won't be worth anything close to $4 million today.
Unless we go through a sustained period of deflation, inflation will erode the future purchasing power of that sum until, to quote that great economic thinker Yogi Berra, "a nickel ain't worth a dime anymore."
Even if inflation were a relatively modest 2% a year, $4 million in 30 years would have the purchasing power of about $2.2 million today. And if inflation heats up to a 4% annual pace, $4 million in 30 years would be the equivalent to about $1.2 million today. Hardly chicken feed, but a long way from $4 million.
Best New Money Moves
If you'd like to see what any sum in the future is worth today at different rates of inflation, check out this present value calculator.
Another key issue is our propensity to view the goal of retirement planning as accumulating a single large sum. The best example of this way of looking at retirement is the too-often-heard phrase, "What's Your Number?"
It's better to focus on the annual income you'll need in retirement rather than some big lump sum. Yes, both are estimates, but income is something that's more easily translated to a lifestyle. Besides, a big number can give you a false impression of how well off you are, as it may not generate nearly as much annual income throughout retirement as you think.
For example, using the 4% rule, a common metric for turning assets into income with a high probability of it lasting at least 30 years, a $4 million nest egg would generate about $160,000 in annual retirement income.
That's in 2042 dollars, however. In terms of purchasing power, $160,000 would be the equivalent of about $88,000 today, assuming 2% inflation over the next 30 years, or roughly $49,000, at 4% inflation. Still meaningful sums, but they don't conjure up that feeling of having hit the jackpot that $4 million does.
One more issue that goes to the heart of retirement planning -- how do you know whether you're saving enough to give yourself a realistic shot at a secure retirement?
You hope to have $4 million socked away by the time you retire in 30 years. But what does that figure represent? Is it the amount you project having based on how much you save and what you expect your investments to earn? Is it the amount you think you'll need to maintain your pre-retirement lifestyle?
Should I contribute to a traditional or Roth 401(k)?
It's hard to get an accurate fix on how much you'll need to save for a retirement that won't begin for several decades. There are a lot of unknowns -- how much you'll earn in the future, what sort of lifestyle you'll lead over the next 30 years, how long you'll live.
You may not be able to save as much as you envision due to layoffs or higher-than-expected living expenses. Your investments might not earn what you expect. You could be forced into retirement earlier than you wish by health problems or a "rightsizing" at work. No one can foresee how things will shake out over the next 10 years, let alone the next 30. By going to a tool like our Retirement Planner or T. Rowe Price's Retirement Income Calculator, you can make some reasonable assumptions about how much you'll need for retirement, how much you should save and how you should invest. From that, you can get a sense of your chances of achieving a secure retirement.
Your assumptions aren't going to be spot on. Life and the financial markets are too unpredictable. But updating your information and assumptions in light of actual experience and re-doing this exercise every couple of years will help monitor your progress. You can make adjustments in the amount you save, how you invest or your planned retirement date. By making a number of small course corrections over the years, you'll reduce the chances of having to make dramatic changes on the eve of retirement.
Ask the Help Desk your retirement planning questions
Instead of wondering what $4 million will be worth in 30 years, I recommend that you focus on getting a realistic idea of how much you should be saving and how you should be investing to retire in comfort -- however many years from now that may be and however large a nest egg you'll eventually need.
MONEY magazine is researching an article on ways to reduce the financial pain of college. We're looking for families that can talk about new and creative ways that they're raising cash for college and cutting costs while they're there. Sound like you? Tell us your story and you might even get your picture in the magazine! E-mail Beth_Braverman@moneymail.com.
View this article on Money
More From Money
Read the original post:
Retirement savings: Will $4 million be enough?
- Ask Larry: Will Changes In The Full Retirement Age Reduce My Social Security Benefit At 70? - Forbes - December 22nd, 2020
- 5 Unexpected Sources of Retirement Income -- All Related to Your Home - Motley Fool - December 22nd, 2020
- Considering retirement? Here's why you need to talk about it. A lot. - Minneapolis Star Tribune - December 22nd, 2020
- 3 Moves to Make Right Now if You Want to Retire Early - The Motley Fool - December 22nd, 2020
- Dont Miss These CARES Act Retirement Benefits - Forbes - December 22nd, 2020
- Supreme Court Justice Stephen Breyer, 82, says he will retire 'eventually': 'Hard to know exactly when' - Fox News - December 22nd, 2020
- Don't forget to check your retirement plan. Here are moves to make before the year is out - CNBC - December 22nd, 2020
- Its Time to Change How We Talk about Retirement, Starting with the Word Itself - Kiplinger's Personal Finance - December 22nd, 2020
- LeBron on course to join legends with jerseys retired by multiple teams - NBA.com - December 22nd, 2020
- I'm retired and won't live to see my mortgage paid off. Should I refinance to lower my monthly payment? - MarketWatch - December 22nd, 2020
- Scarborough superintendent plans to retire at the end of June - pressherald.com - December 22nd, 2020
- Katie Compton winding down storied career, will retire in 2022 - Cyclingnews.com - December 22nd, 2020
- How This Couple Retired At 55 With Just $200,000 In Their Roth IRA Account - Yahoo Finance - December 22nd, 2020
- Retired UW computer science professor embroiled in Twitter spat over AI ethics and cancel culture - GeekWire - December 22nd, 2020
- There Are 5 Types of Retirement Savers, New Research Says. Which One Are You? - Barron's - December 16th, 2020
- IRA Guru Ed Slott On Taxes, Retirement & Roth IRAs - Forbes - December 16th, 2020
- Soothing the Retirement Fears of Middle-Class Millionaires - ThinkAdvisor - December 16th, 2020
- Center for Retirement Research: Public pension plans should avoid investing based on social and environmental movements - Yankee Institute - December 16th, 2020
- Tesla Fever: Understanding Index Funds And How They May Hurt Your Retirement - Forbes - December 16th, 2020
- Grand Forks School Board weighs budget reduction, early retirement concerns - Grand Forks Herald - December 16th, 2020
- Andy King to Retire From Arrow Electronics, Inc. - Business Wire - December 16th, 2020
- Top Ford labor negotiator Gary Johnson to retire after 34 years - Detroit Free Press - December 16th, 2020
- Northam to spend $100 million to reduce teacher retirement liabilities - Richmond.com - December 16th, 2020
- Beware these 15 worst states for taxes on your retirement - Yahoo Finance - December 16th, 2020
- 4 pieces of advice to help you retire comfortably, according to people who have done it - Business Insider - December 16th, 2020
- Common Mistakes That Could Derail Your Retirement and How to Avoid Them - Barron's - December 16th, 2020
- Can You Retire a Millionaire With Index Funds? - The Motley Fool - December 16th, 2020
- A Happier Retirement Could Be Yours if You Do These Things - Journal Gazette and Times-Courier - December 16th, 2020
- Report: This Is How Much It Costs to Retire Happy - The Motley Fool - November 27th, 2020
- Retirement reform likely slips to 2021 as Washington finalizes end-of-year spending - Yahoo Finance - November 27th, 2020
- Man fatally shot by relative in FishHawk Ranch home could be retired Marine officer - Tampa Bay Times - November 27th, 2020
- The 10 Best Places to Retire in America - Money - November 27th, 2020
- Pedro Hernandez, retired justice of the peace, dies - Billings Gazette - November 27th, 2020
- Cover Your Biggest Retirement Expense With $300 Monthly in This ETF - Waco Tribune-Herald - October 19th, 2020
- I want to retire next year, but I have $25,000 in credit card debt and a major monthly mortgage payment I also live with my three kids and ex -... - October 19th, 2020
- With interest rates near record lows, retirement may have to wait - Quartz - October 19th, 2020
- 60% of Medicare enrollees worry about health care costs. Here's the best way to pay for them in retirement - USA TODAY - October 19th, 2020
- These are the 5 best places to retire in America - CNBC - October 19th, 2020
- Forget the Rent, Collect the Yield: Why Investors Looking to Retire Early Should Consider REITs - Barron's - October 19th, 2020
- 4 good ways to go broke in retirement - Fox Business - October 19th, 2020
- Americans Are Facing a $3.83 Trillion Retirement Shortfall. Here's What to Do About It - North Platte Telegraph - October 19th, 2020
- Will There Be an End-of-Year Retirement Exodus? - GovExec.com - October 19th, 2020
- How much you need to invest every month to retire with $1 million to $3 million, broken down by age - CNBC - October 19th, 2020
- South Africas unusual electrical plugs, sockets to be retired - Quartz Africa - October 19th, 2020
- A $5,500 withdrawal from your 401(k) could cost you $30,000 - USA TODAY - October 19th, 2020
- 'Blazing the pathway': Retired teacher could become Kansas' first transgender lawmaker - NBC News - October 19th, 2020
- 5 ways HR can help millennials be smarter than their parents about retirement - Employee Benefit News - October 19th, 2020
- Siouxland veterans and service men and women honor retired flags - KTIV - October 19th, 2020
- Im 63, my husband is 70, well have $90,000 a year in retirement how can we claim our Social Security benefits? - MarketWatch - October 19th, 2020
- Retirement investors: Why it's time to stop using the 4% rule - Fox Business - September 30th, 2020
- Regs on retirement-payment withholding updated - Accounting Today - September 30th, 2020
- Empower to buy Fifth Third's $6 billion retirement business - InvestmentNews - September 30th, 2020
- Retirement Savers: 4 Easy Investing Strategies to Implement Now - SCNow - September 30th, 2020
- Need another income stream? Here are 5 reasons to invest in dividend-paying stocks for retirement. - USA TODAY - September 30th, 2020
- 8 Ways to Save for Retirement as a Freelancer - Entrepreneur - September 30th, 2020
- If you're saving for retirement and are in your 50s, it may be time to reassess your plan - CNBC - September 30th, 2020
- This lesser-known retirement savings tool is loaded with tax benefits - Fox Business - September 30th, 2020
- Op-ed: The pandemic has forced firms to offer early retirement plans. Heres what to consider before you decide to pack it in - CNBC - September 30th, 2020
- Even Seniors Who Are Good Savers Stand to Fall Short in Retirement, Report Concludes - Barron's - September 30th, 2020
- Women's Health Care Costs in Retirement Projected to be $200000 More than Men's - Business Wire - September 30th, 2020
- Trinseo Announces the Retirement of Stephen M. Zide and Christopher D. Pappas from Its Board of Directors - Business Wire - September 30th, 2020
- 5 Reasons to Invest in Dividend-Paying Stocks for Retirement - The Motley Fool - September 30th, 2020
- Gardner Fire Chief Richard Ares honored on the eve of his retirement as U.S. Rep. Lori Trahan officially announces $240K grant for his department -... - September 30th, 2020
- Here's what your monthly budget will look like if you retire with $2 million - CNBC - September 30th, 2020
- Parmer to retire as Baptist CEO after more than 30 years - Beaumont Enterprise - September 30th, 2020
- 3 Pitfalls of Only Using a 401(k) for Retirement - The Motley Fool - September 30th, 2020
- Whats your takeoff point? The moment youve saved enough for retirement - The Dallas Morning News - September 30th, 2020
- Your retirement probably won't be anything like your parents'...and that's not good news - MarketWatch - September 23rd, 2020
- This study finds that those who retired early lost brain power - MarketWatch - September 23rd, 2020
- With remote work flexibility, some people opt to relocate ahead of their retirement - CNBC - September 23rd, 2020
- My grandma's secret to a comfortable retirement for the past 22 years - Business Insider - September 23rd, 2020
- Most Americans are behind on their retirement savingshere are some tips to catch up - CNBC - September 23rd, 2020
- Retirement is coming, but it won't be smooth sailing - WATN - Local 24 - September 23rd, 2020
- If youre home-rich but cash-poor, heres what to know about reverse mortgages - CNBC - September 23rd, 2020
- Here's how to take the mystery out of picking the best retirement savings plan for you - CNBC - September 23rd, 2020
- CalSavers will help people save for retirement. What to know - Los Angeles Times - September 23rd, 2020
- College-Based Retirement Communities Have Been Upended by Covid. Are They Still Worth It? - Barron's - September 23rd, 2020
- 3 things to do immediately if you have no retirement savings - Fox Business - September 23rd, 2020
- What NOT to do with your retirement savings in a crisis - MarketWatch - September 23rd, 2020
- Fortis Inc. Announces Retirement of President and CEO Barry Perry and Appointment of David Hutchens as Successor Effective January 1, 2021 -... - September 23rd, 2020