You've done your homework. You've run your retirement numbers, and they tell you that if you had $1 million in your pocket, you could comfortably retire tomorrow. Great!
Of course, if you're like most of us, you don't have a spare million at the moment. Oh, sure, if you keep investing, you can get there eventually. There's only one problem with that plan: The goalposts keep moving farther away.
Hit a moving target
That's because inflation eats away at the purchasing power of your cash. So, the longer it takes to amass your nest egg, the bigger that nest egg needs to be to maintain the same purchasing power as today's cool million.
How bad can it get? That depends on how nasty inflation will be and how long it'll take you to reach your target. Here's how much money you'll need to replace $1 million of today's cash in the future, depending on when you'll need it and what inflation could look like between now and then:
|
Years to Go
|
2% Inflation
|
3% Inflation
|
4% Inflation
|
5% Inflation
|
|
5
|
$1.1
|
$1.2
|
$1.2
|
$1.3
|
|
10
|
$1.2
|
$1.3
|
$1.5
|
$1.6
|
|
15
|
$1.4
|
$1.6
|
$1.8
|
$2.1
|
|
20
|
$1.5
|
$1.8
|
$2.2
|
$2.7
|
|
25
|
$1.6
|
$2.1
|
$2.7
|
$3.4
|
|
30
|
$1.8
|
$2.4
|
$3.2
|
$4.3
|
|
35
|
$2.0
|
$2.8
|
$4.0
|
$5.5
|
|
40
|
$2.2
|
$3.3
|
$4.8
|
$7.0
|
|
45
|
$2.4
|
$3.8
|
$5.8
|
$9.0
|
|
50
|
$2.7
|
$4.4
|
$7.1
|
$11.5
|
Dollar amounts in millions.
Some of those numbers are downright scary -- $11.5 million? To replace a "mere" million today? That's what it'll take if inflation runs at 5% for the next 50 years.
Can you get there?
Before you panic, there's a silver lining to this dark cloud. If you've got any appreciable amount of time left before you plan to retire, you can get there. This table shows how much you need to sock away every month at a 10% annual return to hit the inflation-adjusted $1 million mark:
|
Years to Go
|
2% Inflation
|
3% Inflation
|
4% Inflation
|
5% Inflation
|
|
5
|
$14,257.78
|
$14,970.53
|
$15,711.50
|
$16,481.53
|
|
10
|
$5,950.81
|
$6,560.65
|
$7,226.17
|
$7,951.84
|
|
15
|
$3,247.20
|
$3,758.94
|
$4,345.17
|
$5,015.87
|
|
20
|
$1,956.82
|
$2,378.44
|
$2,885.45
|
$3,494.08
|
|
25
|
$1,236.48
|
$1,578.03
|
$2,009.17
|
$2,552.21
|
|
30
|
$801.31
|
$1,073.78
|
$1,434.82
|
$1,911.95
|
|
35
|
$526.75
|
$741.15
|
$1,039.36
|
$1,452.87
|
|
40
|
$349.15
|
$515.81
|
$759.17
|
$1,113.20
|
|
45
|
$232.56
|
$360.75
|
$557.23
|
$857.14
|
|
50
|
$155.36
|
$253.05
|
$410.21
|
$661.92
|
Dollar amounts in actual dollars.
Here's the good news: Based on the amount you need to sock away each month, reaching $11.5 million in 50 years can actually be easier than hitting $1.8 million in 30. This is why you must invest now.
Preserve your hard-earned wealth
Unfortunately, reaching your wealth target is only half the battle. Once you've accumulated enough capital to retire, you still need to make sure it'll last as long as you do.
The rule of thumb when it comes to withdrawals is that you can spend 4% of your retirement savings per year. History indicates that your cash will very likely last at least 30 years if you follow this tack, no matter what the market does.
Get that 4% in cash
The most straightforward way to put that 4% in your pocket is to buy companies that'll hand it to you simply for owning their shares. Here's a short list:
|
Company
|
Recent
Yield
|
Five-Year Compound
Annual Dividend Growth Rate
|
|
Citigroup (NYSE: C)
|
4.1%
|
26.5%
|
|
Kinder Morgan Energy Partners (NYSE: KMP)
|
6.2%
|
8.2%
|
|
NSTAR (NYSE: NST)
|
4.0%
|
3.8%
|
|
Pfizer (NYSE: PFE)
|
4.4%
|
17.0%
|
|
Realty Income (NYSE: O)
|
5.9%
|
5.4%
|
|
Vector Group (NYSE: VGR)
|
8.1%
|
5.0%
|
While it's unlikely that Citigroup will be able to keep up that extraordinarily rapid dividend growth rate forever, the company's history of rewarding its shareholders with rising dividends inspires confidence that its payouts will at least keep pace with inflation over time. And that's what really counts.
Get started now
Whether you're a young whippersnapper just starting out or a seasoned veteran staring a retirement date in the face, your retirement is the biggest financial milestone of your life. To properly prepare for and master that time of your life, you need to start building and working against your plan now.
To help you start down a successful path to and through retirement, take the next 30 days to try us out at Motley Fool Rule Your Retirement, free of charge. Once you discover how powerful an effect a bit of planning today can have on your ability to combat the ravages of inflation after you've left the workforce, you'll be glad you did.
At the time of publication, Fool contributor Chuck Saletta owned shares of Kinder Morgan Management, a related company to Kinder Morgan Energy Partners. Pfizer is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.
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