People highly underestimate how much they really need to save for retirement. Apparently, 40% are at risk of going broke in retirement! I think this is especially applicable to those in the FIRE category who think they can literally retire on $1 million and not have to work another day in their lives by being as frugal as they possibly can. Even if they believe they can get by with a part-time job, it can be potentially very dangerous.
Unless you have an extremely profitable side gig like blogging, it’ll probably be tough to make $1 million stretch as long as you would like. The problems vary from being overly optimistic to not thinking about your future self to something so basic as not accounting for inflation.
- 71% of People Don't Realize They are Paying Fees in Their 401k Plan: Here's How to Take Action
- Prevent Yourself from Overspending: Open a Savings Account Today
- Save Your Money and Quit Going to the Gym
- The One Habit Eating Your Net Worth and How to Stop it Now
- The 10 Questions to Ask Your Financial Advisor ASAP
- 66% of Americans Are Losing Hundreds of Thousands of Dollars: How to Fix it
- The #1 Mistake Costing You Millions
Here are 8 reasons I thought of why $1 million is probably not enough to retire:
Difficulty planning so far ahead
- It’s very hard to plan for your future self especially if that future self is in 40 or so years
- That seems so far away it’s not even realistic to begin thinking about how the decisions you make today are going to affect you then
- But when it comes to retirement and your net worth, your decisions now more than ever are going to be what makes the difference
- Mainly this is attributed to compound interest and learning how to invest
- Visualizing your senior self will help you make better decisions
- When you do it this way, it gives you a sense of urgency you wouldn’t otherwise have, most likely helping you save more and invest more to get a net worth greater than $1 million to fend against the unexpected
- But why would you feel an urgency anyway? If you’re in your 20s and plan on retiring in your late 60s, you’ll be working twice as long as you’ve been alive, that's a long time!
- People think they’ll deal with their problems later, like if and when they have $1million in retirement and realize it’s not even close to enough to sustain their current lifestyle
- It’s so far away, it’s not even in their mind
- But if you want to prevent a self-induced heart attack from financial instability, save more and invest more to make sure you’re in a great position for retirement
- You should always try to shoot for more money in retirement than less; you never know, you may end up wrong and realize you needed $5 million instead; it’s always better to overestimate than underestimate in that scenario
$1 million even today is not a lot
- When you really think about it, $1 million is nothing
- Even if you want to tell me you’re being very frugal by splitting your toilet paper ply, or dumpster diving or doing anything really crazy that if you’re completely honest with yourself, doesn’t make your life any better or easier, it’s probably not enough if you retired early
- If you want to retire early, if you were to live off $1million, for say 60 years if you were to “retire” at the age of 28, you'd need to be able to live off of $16,666.67 in today's dollars; that's a little over $1,000 a month; that's not even taking inflation into consideration
- What kind of life is that to basically suffer and not enjoy the fun things in life like being able to take a vacation without having to worry about counting every penny?
- If you want to live in the United States it’s not realistic to think you can live off $1million dollars for the rest of your life
- Only 25% have more than $200,000 saved for retirement
- Even worse, look what I just came across!
- Finally, someone who agrees with me
- According to the article, even living in Mississippi isn’t good enough to make $1 million last an entire retirement
- You only get a little past 26 years
- And that’s in today’s dollars
The purchasing power of $1 million in 40 years is equal to $372,431 with an average inflation rate of 2.5%
- This is probably the biggest mistake everyone I talk to makes
- They assume a dollar is worth a dollar the next day
- Actually, it’s probably second only to not learning how to invest as the biggest mistake
- When I bring this up to people it’s like they never thought of it before
- Then I can see them thinking about it and getting upset they need to start saving more or need to wait longer until they can retire
- That’s just the reality of it
- Even if you cut the years in retirement to 20, that still averages out to $18,621 per year without accounting for the rate of inflation every year you’re in retirement
- Remember, prices double around every 20 years
The average life expectancy keeps increasing
- Despite the average life expectancy decreasing in the last two years, overall, the trend is it's increasing
- If you’re going to live longer, you’ll probably have a longer retirement
- It probably goes without saying, but if you’re going to have a longer retirement, you need to make sure you have more than $1 million dollars
- There’s just no feasible way you’ll be able to make it with just $1 million
- Being a millionaire doesn’t mean what it once used to
A lot of retirement calculators are based off unrealistic returns
- This is why most retirement calculators are misleading and quite frankly, wrong
- They don’t take inflation into account and may not even take into account a longer retirement than on average
- Some also are based on up to literally 15% performances on your investments, it's ridiculous
- There’s no way if you’re not interested in learning about investing and putting the time in that you’ll be able to pull off a 15% average performance
- To account for inflation, you’re probably going to get a 7% performance at best
- A $100,000 investment growing at 7% for 40 years turns into $1,497,446
- At 15%, it turns into $26,786,355
- Don’t ever listen to calculators telling you they’re based off an above average rate
- Even the ones that are based off an “average” performance indicate 10%, not taking off the 3% for inflation
- Don’t be fooled! Always take preventative measures and try to save and invest to get much more than $1 million into your nest egg
Retirement calculators base the amount needed on how much your current salary is
- If you're young, you will probably be making considerably less now compared to later
- You also probably require much less to live on than if you were married, with kids and a house and a yard to maintain
- Literally, every single retirement calculator I’ve come across never accounts for a salary increase in addition to the inflation I mentioned earlier
- Are you really going to be making $35,000 the rest of your life or are you more likely to get a promotion or a salary increase when you change jobs?
- Your standard of living is probably going to increase which in turn requires more money
- There’s no way $1 million will be able to support even a minimal lifestyle in 30-40 years
It's very hard to estimate what your expenses are going to be down the road
- This is especially true if this is before you have a family or take health care costs into account when you are older
- Sometimes people don’t realize the amount of care a house requires if you own it between the house itself and the yard
- You also need to prepare for unexpected costs like flooding, animals ruining your yard or gutters, etc.
- Sure you have insurance, but you still need to pay the deductible if you didn’t exceed it
- Kids also can get pretty pricey the older they get
- I know so many parents who weren’t thinking into the future and decided it would be a great idea to have 3-4 kids, but when college came along they either dipped into their retirement funds to pay for college or dumped student loans on them
- Health care costs as you get older also become expensive since you’ll most likely need more care and medicine to stay healthy
- If you plan on taking the brunt of this on while you’re retired, there’s literally no way you’re getting by with $1million
- We also tend to not realize we’re probably going to be spending more in retirement on food, drink, leisure and activities we enjoy
- Instead of having 2 days for the weekend, pretty much every day is the weekend
- If you’re the type who has expensive tastes or likes to go on vacation a lot, it might be worthwhile to reconsider how much you’re realistically going to be spending each year
The Planning Fallacy that we're all susceptible to
- This is the tendency for people to be overly optimistic about accomplishing a future task or to underestimate how much time that task will take
- Younger people are more likely to put off saving for retirement because it seems so far away
- But with compound interest on your side as a 20 something or 30 something-year-old, the best thing you can do is start now
- You don’t realize how much of an effect compound interest has on your net worth until you actually take the time to calculate it yourself
- Not only that, but there is also evidence to suggest you won’t reach your goal nearly as quickly because you’ll become accustomed to a certain lifestyle that’s too hard to maintain and save at the rate you’d need to be saving at in order to reach your net worth goals
- People think they can play catch up with their savings to reach their retirement goals, but putting off investing can put you very behind
- Here is not the time to be overly optimistic
- You need to play on the defense and save as much as you can in your early 20s and 30s for yourself so you can relieve yourself of the stress of playing catch up with your savings to reach your retirement goals
- Realizing that we all over and underestimate how likely we are to accomplish things can be a very helpful skill
- Like for myself and this blog for instance, I thought I would be able to get 100 subscribers 7 months into starting this blog
- I completely underestimated how much learning there was to do and if I was going to get a few months ahead in content, that was going to take a much longer time than I anticipated
- It took me 10 months to finally make my blog live between the learning curve, the designing, blog post planning, etc.
- We’re all prone to it, the best thing to do is just accept it and figure out ways to put ourselves in the best possible positions whatever our goals are
While it's a case by case on how much you need to retire, never assume what you read in the media or from retirement calculators is an accurate depiction. They don’t know your personal situation, they don’t know you as a person.
Personally, I stay on the conservative side and try to plan ahead and save more and invest more as much as I can. Without losing my mind of course. Just make sure to be on the lookout of the metrics these calculators base their predictions on. They definitely fooled me.
One time a site literally said I could live off a $1 million retirement fund. That retirement was an estimated 10 years. So basically I needed to be dead after 10 years. Thanks for nothing!
How much do you want to have saved for your retirement? Do you really think it'll be enough?
Like what you read?
Join all of us to get the latest posts on how to make, save and invest more. It's the only way to your financial freedom. In addition, you get the FREE Coffee Habit Worksheet to track your minor spending and see how it's really costing you over the long-term.