The High Cost of Waiting

Let’s say you want to save $1 million dollars by age 67. It is certainly doable, but a lot depends on when you get started. Let’s take a look at the math to help you get there.

It’s an obvious statement, but one that warrants repeating: the longer you wait to start investing, the more you'll have to put away each month to reach $1 million.

  • 27 years old? You have to put away $214 a month to reach $1 million dollars.
  • Start at age 37, and you're putting away $546 a month to reach your goal.
  • Begin at age 47, and you'd have to put away $1,497 a month.
  • Wait until age 57, and you're putting away a hefty $5,168 a month.
  • Wait until the last minute (age 62) and you'd have to stash $13,258 a month to reach $1 million by age 67.
So, the sooner you start saving, the fewer dollars you'll have to put away each month to reach your retirement goals. So it’s important to not pay the high cost of waiting!

But Is $1 Million Enough?

To most, $1 million seems like it should be plenty. And while 90% of U.S. retirees have not amassed this amount, the reality is that $1 million doesn’t go as far as you might think, especially when you consider that we are living longer and we probably don’t want our standard of living to change much in our retirement years. So let’s see what it takes to provide $100,000 income annually during retirement and see if that $1 million is enough.

The 4% Rule

The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years. Like any rule of thumb it is just that, an estimating tool. At you own peril, do not depend on this rule – instead work with a professional to create a real financial plan for your retirement.

Using the 4% rule as a quick “back of the napkin” estimating tool, let’s see how someone with $1 million can hit $100,000 (gross before any taxes are paid). Note this is not to say that everyone needs to spend $100,000 or any particular amount during their retirement, but rather this example is simply meant to illustrate the math involved.

Doing The Math

The $1 million will yield $40,000 per year using the 4% rule. This leaves a shortfall of $60,000 per year. A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year.

The shortfall is now down to $20,000.

Closing The Income Gap

In our hypothetical situation the couple has a $20,000 per year gap between what their retirement accounts and Social Security can be expected to provide. Here are some ways this gap can be closed:

  • Perhaps they have one or more pensions in which they have a vested benefit.
  • This might be a good time to look at downsizing their home and applying any excess cash from the transaction to their retirement.
  • If realistic, perhaps retirement can be delayed for several years. This allows the couple to not only accumulate a bit more for retirement but it also delays the need to tap into their retirement accounts and builds up their Social Security benefit a bit longer.
  • It might be feasible to work full or part-time during the early years of retirement. Depending upon one’s expertise there may be consulting opportunities related to your former employment field or perhaps you can start a business based upon an interest or a hobby.
Things to beware of in trying to boost your nest egg:

  • Don’t be too cautious with your investments in retirement, inflation is a retiree’s worst enemy.
  • On the flip side, don’t take on excessive investment risk in an effort to catch up if you feel that you are behind where you need to be.
The scenario outlined above is hypothetical but very common. As far as retirement goes I think financial journalist and author Jon Chevreau has the right idea: Forget Retirement, Seek Financial Independence. Let’s set some time to meet and discuss how we can set you on the path towards financial independence.