Are you hoping to save $1 million for retirement?
A seven-figure nest egg sounds like a substantial sum, which may have you convinced that becoming a millionaire will leave you well prepared for your later years.
The reality, however, is that $1 million may not stretch nearly as far as you're hoping it will. In fact, you may be shocked at just how little income you'd actually end up with if you hit your $1 million goal but didn't do so until far in the future.
Here's what life with $1 million in retirement savings would look like
Having $1 million saved for retirement doesn't mean you can just spend at will, because taking too much money out of your retirement fund would leave you at risk of running out of cash while you still need to rely on that account.
You'd need to limit the amount of your million that you access each year by choosing a safe withdrawal rate. There are a number of techniques to do that, but one common one is called the 4% rule. If you follow it, you can take out 4% of your retirement account balance in the first year after quitting work and then increase withdrawals annually only to keep pace with inflation -- and you theoretically shouldn't run out of money.
If you have $1 million saved and you opted to follow the 4% rule, that would give you $40,000 annually in retirement income. Sounds pretty good, right?
The only problem is, you have to consider how inflation is going to affect your buying power. If you have $1 million right now and are retiring, you're probably in pretty good shape. But if you're working now on saving $1 million for a retirement that's 30 years away, your nest egg is going to be worth far less in real terms once you take inflation into account.
If you retire in 2051 with $1 million and follow the 4% rule, your $40,000 in retirement income that your investments produce will likely only have the buying power of $19,070 in today's dollars. And that may not be enough to allow you to maintain your standard of living, especially when you consider the fact that Social Security also isn't keeping pace with inflation and that benefit cuts in the future are a real possibility.
Be smart about your retirement prospects
The bottom line is, when setting retirement goals, you must consider how much income your investments will produce for you in the future -- and what buying power that amount of income will provide after taking the effects of inflation into account.
The further away you are from retirement, the more important it is to do that assessment; otherwise, you may see that your projected future retirement account balance looks like a large number -- like $1 million -- but actually won't stretch nearly as far as you think.
And it's better to know that early on in life so you can set a higher retirement savings goal and work toward building the financial security you deserve.