So is a million dollars enough to retire on? That depends on several variables, but two factors are especially important: when you plan to retire, and what lifestyle you want to maintain in retirement.
What will a million dollars be worth when you retire?
An effective way to save for retirement is to set a target for how much money you'll need, and then work back from there to compute the savings rates you'll need to maintain over the course of your career. To give you a concrete example to shoot for, consider whether $1 million would be a worthwhile retirement savings target.
The answer to that depends on when you plan to retire, because the further your retirement date is in the future, the more inflation will erode the value of your retirement savings.
Over the past 50 years, inflation has averaged 4 percent a year. If this rate of inflation continues in the future, here's what it will do to the value of a million dollars by various possible retirement dates:
If you retire in...
Here's what $1 million will be worth in today's dollars
In other words, if your retirement is 40 years distant, you'll have to set your sights on FIVE million of today's dollars to have the kind of purchasing power you would associate with a million dollars today.
What kind of lifestyle will this support?
While having a target is helpful in determining the necessary savings rates, the size of your retirement nest egg doesn't tell you much about the lifestyle it would support. For that, you'd need to compute how much you could spend per year, and still have your nest egg last throughout your retirement.
Taking some fairly conservative assumptions (6 percent return, 4 percent inflation, and 25 years in retirement), if you retired on a million dollars today, you could spend about $52,000 the first year, and then adjust it for inflation for each of the subsequent 24 years before you would run out of money.
If that sounds like enough to live on, then maybe a million dollars would be enough for you -- if you are retiring now. If you are retiring many years in the future, inflation may well reduce the value of that income level to the point where it is below the standard of living you desire.
Wrestling with the unknown
One challenge of retirement planning is that there are so many variables, including:
Experimenting with a retirement calculator is one way to test how some of these variables might affect your future.
There is no single answer to the question of whether a million dollars is enough to retire on, but the further away your retirement date is, the more likely the answer will be "no." Thanks to inflation, being a millionaire is becoming less valuable every year.
Let GetRichSlowly know what you think of this issue -- how far off is your retirement date, and what savings target are you shooting for?