Why saving $ 1 million for retirement doesn’t make sense
It becomes even more difficult if savers think that having $ 1 million in retirement savings is a magic number for retirees to qualify for the Secure Retirement Club. In fact, we’re going to explore why this kind of backup goal can only provide an illusion of security.
Let’s start by looking at how inflation shifts the target posts …
This is not your father’s IRA balance
When dad saved for retirement, every dollar he raised was gone much further than today. Let’s say he was born in 1941.
We are going to make some assumptions here:
- Retirees spend around half the national average salary each year (social security and other benefit programs will cover the rest of their expenses)
- Retirees need an additional 15% above this number for unforeseen expenses
- Retirees will enjoy their retirement for about 20 years
When he retired at 65 his “magic number” for the retreat was:
National average salary: $ 38,651.41
Cost of the retreat: $ 444,491
Uncle Dale (daddy’s little brother), born 13 years later in 1954, reached retirement age just a few years ago. He saved about as much for retirement as Dad did. However, these 13 years have made a big difference…
National average salary: $ 54,099.99
Cost of retirement: $ 622,148.85
It boils down to a 40% increase in the cost of retirement… in only 13 years old.
What is happening? Why does Uncle Dale need so much more than Dad to retire?
This is most because of inflation. (While there are other complicating factors as well, such as the near zero return on ‘safe’ assets like government bonds, CDs, and savings accounts, in reality it’s mostly inflation.)
It’s a thing of the past, isn’t it? What happens when we look to the future?
$ 3 million is the new $ 1 million
If you are currently in your 30s, the picture seems to be getting a lot more dire. you will need $ 2 million (and that assumes that inflation stays around 3%, which is unlikely):
Using an average inflation rate of 3%, the math shows that you’ll need $ 2.1 million in savings to match the purchasing power of $ 750,000 today.
Personal finance blogger Financial samurai think that even if you managed to raise $ 1 million for retirement today, it won’t go as far as you think. You strength save a meager income throughout retirement (if nothing goes wrong):
If you retired today at age 65 with $ 1 million, you may be able to spend $ 40,000 per year (4% withdrawal rate) for 25 years. But you could also run out of money before you die.
This lifestyle doesn’t sound like a million dollars a lot. It is because the purchasing power you have today will not be the same in 10, 20 or even 30 years. So instead of “how many dollars” someone might be saving for retirement …
And that’s what led Financial Samurai to say, “$ 3 million is the new million dollars”.
But you know what? The numbers don’t even really matter.
We need to change the way we think about retirement savings
Inflation makes the “magic number” of dollars we might think we need for the retirement we want completely irrelevant. Or at least obsolete.
Instead, we can think in terms of purchasing power.
The number of dollars today has no importance. All that matters is their future purchasing power.
This is what makes this foxtrot cartoon funny. Jason Fox is thrilled to be a millionaire (in Turkish lira) without realizing it his purchasing power has not changed. A million lire buys the same price as $ 13.06 …
So don’t spend too much time obsessing over a magic number. Instead, think about your purchasing power.
Fortunately, certain types of assets block purchasing power. Inflation-resistant assets like Inflation-Protected Treasury Securities (TIPS) and Series I Savings Bonds (I Bonds) grow at the rate of inflation.
TIPS are defined by the US Treasury as an asset that “increases with inflation and decreases with deflation, as measured by the Consumer Price Index [CPI]. When a TIPS expires, you receive Adjusted Principal or Initial Principal, whichever is greater. »Basically there is a nominal return more an inflation adjustment that you receive when the bond matures. TIPS also include a drop guarantee, as you always get back at least your initial investment.
You can see current TIPS rates here.
I bonds are defined as “a low-risk savings product. Over their lifetime, they earn interest and are protected from inflation” depending on the evolution of the CPI. Bonds I are a personal finance version of TIPS (although individual investors can purchase both). In fact, I Bonds were so popular for a time that the Treasury now limits purchases ($ 10,000 per year in electronic bonds + an additional $ 5,000 per year in the form of federal tax refunds). You can learn more about I-bonds here.
Right now, the yield on I Bonds is 3.54%, which seems fantastic compared to CDs or savings accounts… Much less fantastic when you realize that it’s not really profit. It’s just a return of purchasing power devoured by inflation.
Now, both sound like great ideas when taken at face value because they are protected from inflation. The problem is, both are based on a few assumptions:
- The stated CPI is correct. (Watch “Real” inflation, we know the Fed likes play games with inflation numbers.)
- The solvency of the US government. Maybe that sounds silly to you. History students may remember the US Debt Defaults of 1790, 1861, 1933, 1979, and of course the near miss of 2013.
The good news is that there are alternatives that don’t rely on creditworthiness or inflation. reports …
Examine pension assets that preserve purchasing power
Do you know why central banks around the world hold gold? Precious metals have inherent value for thousands of years because they are tangible and finite resources. Precious metals are not controlled by any central bank or any government. Gold cannot simply be “printed” like dollars or euros. In addition, gold is a store of value.
“Reserve of value” is exactly what we are looking for. Gold is not tied to a magic number that can be doubled or tripled by inflation. This gives physical gold and silver a unique advantage of being a hedge (the word bankers use to describe protection) against inflation. This gives savers a better chance to avoid the dilemma of planning for tomorrow’s retirement and thinking in today’s dollars. Inflation-resistant assets can help you see beyond the numbers and focus on maintaining your purchasing power in the future.
Peter Reagan is a financial markets strategist at Birch Gold Group. As Precious Metals IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Discover more by by clicking here now.
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