Who wants to be a millionaire?
Well, J. Money does, for one. Not only does he have his own millionaire club with a swanky gold leafy discus logo … but he's crunched the numbers and he thinks that it can happen on just five bucks a day. Granted, that's $5 a day for 40 years, earning 10% interest, in a tax-deferred account, but I'll give him a hat tip for not defying the laws of gravity quite as badly as Dave Ramsey. 😉
Let's suppose that Mr. J is right, and that $5/day will really grow to a million bucks just like he said. Here, then, is the million-dollar question:
Will $1 million in the bank be enough to retire on?
Free Money Finance passed on a link from Yahoo! Finance which says that $1 million will be enough, but only for current senior citizens. For younger folk, it will likely fall short. As GenXers we'll need around three times that amount, according to the article.
Let's do a really rough calculation using the “4% Rule” which involves withdrawing 4% of the total retirement savings the first year, and indexing this amount to inflation. In essence, the annual amount will, in principle, have the value of 4% of the nest egg at the time of that first withdrawal. So, if my nest egg is $1 million at retirement, my annual withdrawal would be $40,000. That's likely going to be not nearly enough to live on in thirty years. Even $120,000 (4% of $3 million) will be pretty meager. $10 million? Maybe now we're talking.
Now, of course, $1 million is far, far better than nothing. Considering the maximum Social Security benefit for current retirees is under $30,000 per year, $1 million in the bank would more than match what Social Security tops out at now.
I think where the real money is, though, isn't with passive investments, but with building up some kind of side business in what was previously “spare time.” Something that can be done in “retirement.” Getting $10 million which may or may not be worth anything at some point in the future seems more risky than building up expertise, steadily, in something enjoyable, that someone will pay for.
Haha, why hello there good sir 😉 True indeed – $1 Mil now won’t be as sexy as $1 Mil in 40 years. But the real point of the $5/day project is to get people to START saving and to let them know that it pretty much is *that* simple to become a “millionaire.” Which, let’s face it, most get excited at the very thought of being in that club – no matter what it’s worth now or 100 years from now. The sad part about it all is that the odds of people acting on it are slim, and even more so taking it to another level and saving/investing even MORE.
So yeah, $1 Mil may or may not be enough to retire on down the road, but if it gets you to stop and think about it while you’re young, it’ll hopefully spark enough excitement to propel you savings strategy going forward.
Have you ever looked in to immediate annuities? I don’t sell them, and I am not pushing them either, but try out one of those calculators. When you plug in your number (1 million) and your age and state, you can see what they would pay. Most seem to pay out around 4k a month. I could live on that.
As I commented on J. Money’s blog, I prefer realism over the “excitement” he recommends. Excitement doesn’t guide strategic behaviors; realism does.
The original blog post is completely unrealistic, because 10% average returns for 40 years is unlikely, but even worse, it is not taking into account capital gains taxes.
$1mil is enough if you have ZERO debt. $3-5 million is probably a more reasonable amount for retirement.
The stock market is an illusion, so don’t count on anything more than a 4% return!
Best,
Sam
Great article, but sadly it is not as easy as just stocking away 5$ a day. Dont we all wish it was that easy. But the second point about building up a second side business that can be profitable through your retirement years is a great idea. Simple businesses or investments like a rental property are profitable and not to time or labor intensive which makes them ideal for recently retired adults.
If we are talking about 20years ago, 1 million would be enough for retirement, but this amount is never enough for the present time, I am thinking of at least 2 to 3 million to be worry free.