A million smackers. To many people, it's a magic number. It's what we often shoot for -- who, after all, doesn't want to be a millionaire? (Perhaps only billionaires.)
Let's look at this financial goal from a few angles, shall we? I think there are some insights worth mulling over.
Maybe you'll get there, maybe not
For starters, don't assume you can get there at your current rate of saving and investing. Here are a few sample calculations:
- Let's say you have $50,000 socked away now, and you add $5,000 per year to your investments. If you have 25 years before retirement, and you expect to earn 10% annually, you'll end up with . around $1.1 million. Phew! You made it!
- But the market won't necessarily grow 10% annually, on average. Maybe the average rate during your 25 years is just 8%. If so, you'll end up with $740,000.
- What if you don't have that $50,000 already invested? What if you've got nothing already invested, or worse yet, what if you have credit card debt? Well, it's generally smart to pay off any high-interest debt before you begin investing. So let's say you start with just $5,000, and add $6,000 per year: By year 25, at 10%, you'll end up with more than $700,000.
Don't assume that you're saving and investing enough. You may not be. And the market may not do what you expect, or hope, over your personal investment timeframe. So be as generous as you can with your saving.
Maybe you're investing effectively, maybe not
Examine your investments. How well have they done for you on average? If you're not a brilliant stock picker, maybe you should stick with a broad market index mutual fund, such as the Vanguard S&P 500 Index fund (FUND:VFINX). Many of its top holdings have done fairly well over the past 20 years. Both ExxonMobil (NYSE:XOM) and General Electric (NYSE:GE) have increased in value some 19-fold (which would turn $5,000 into $95,000). Citigroup (NYSE:C) grew some 27-fold (turning $5,000 into more than $135,000), and American International Group (NYSE:AIG) grew some 15-fold. Overall, the stock market has advanced an annual average of about 10%. Have you been topping that? If not, head for an index fund.
I hesitate to mention that Microsoft (NASDAQ:MSFT) increased in value more than 300-fold in that period because that's certainly not the norm. And not every stock in the S&P 500 surges -- Brunswick (NYSE:BC) grew just fivefold, roughly, over the past two decades.
Maybe a million will be enough, maybe not
Next consider whether a million dollars is even going to be enough for you. In our Motley Fool Rule Your Retirement newsletter service, editor Robert Brokamp offers lots of practical advice and inspiration each month. He suggests that during retirement a safe portion to withdraw from your nest egg each year, if you want it to last through your retirement, is about 4%. If your nest egg is a million dollars, 4% is $40,000. That's not small change, but is it enough?
Will you be able to live like you want to live on $40,000 per year? (Perhaps you'll also receive some Social Security benefits, but maybe those of us who aren't too close to retirement shouldn't count on that.) Take a few minutes and run some numbers. Add up how much you want to spend on travel and entertainment and electricity and property taxes. And then throw in health care costs, which may well be whopping, given recent growth rates.
Maybe you're on track, maybe not
So are you on track? Are your financial ducks in a row? It's really important to assess your own situation. Make a big financial plan. Figure out how much you need to retire and how you'll get there. Make sensible use of 401(k) plans and IRAs.
If you're hesitant to do this on your own, don't feel bad. This stuff is so important that it's a good idea for many people to get some professional help. Learn how to find good help at our Advisor Center -- and perhaps check out our TMF Money Advisor service, which features customized independent advice from a variety of objective financial experts. (You can try it for free.)
I also encourage you to take advantage of a free monthlong trial of Rule Your Retirement. You'll be able to access all past issues, which cover important topics ranging from asset allocation and optimal withdrawal rates to investing in real estate, and more. The subscription also gives you access to the private, dedicated discussion boards, where you can interact with fellow subscribers and Robert himself, drawing even more inspiration and practical guidance.
If you're interested, you can get a taste of Robert's smarts and style in these articles:
- Do You Want to Work Forever?
- Get Rich by Beating the Odds
- Annuities: Who Needs 'Em?
- 7 Social Security Myths
Here's to a comfy and happy retirement! (And hey -- consider forwarding this article to anyone whose retirement you care about. Just click on the "Email this Page" link near the bottom of the page.)
Selena Maranjian's favorite discussion boards include Book Club, The Eclectic Library, and Card and Board Games. She owns shares of Vanguard S&P 500 Index fund and Microsoft, a Motley Fool Inside Value recommendation. Formore about Selena, viewher bio and her profile. You might also be interested in these books she has written or cowritten:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.
