Retiring: Is $1 Million Enough?

The $1 million mark has long served as the ultimate retirement account target for many aspiring retirees. Those who manage to stash away seven figures earn millionaire status in addition to feeling as though they will be able to support themselves comfortably after they stop working. However, times change, and $1 million no longer stretches as far as it did in the 1990s and 2000s.

Is it still possible to retire well on $1 million? The answer to that question depends on a number of individual factors that can change over time. We’ll help you understand how the purchasing power of your retirement savings can fluctuate, giving you the information you need to come up with your own magic number. The average person can become a millionaire with a little discipline and the help of some powerful savings vehicles.

KEY TAKEAWAYS

• You need to determine how much money you will need per year to retire in your chosen manner.
• Health care often accounts for one of retirement’s greatest costs.
• Life expectancy, tax rates, market fluctuations, and unexpected expenses all need to be factored in to your retirement plan.

Will $1 Million Last for Retirement?

Several factors determine how long your savings will last after you retire. Some are fairly straightforward, while others are less obvious and more difficult to predict. Here are some of the basic questions you should ask yourself when determining the proper retirement savings target for you.

Lifestyle

• How much will you need to withdraw every year to support yourself after you retire?
• Are you a lavish spender or a thrifty bargain hunter?
• How much do you want to have available for discretionary expenses, such as vacations?

Health

• Does your health already require significant expenditures?
• What should you put aside, given that healthcare costs generally increase as you age?

Age

• How old will you be when you retire?
• How long do you believe you will live? The Social Security Administration publishes actuarial life tables that list average life expectancy according to age. The age your parents and other family members lived to is another clue.

Taxes

• What are your expectations for your tax rate throughout your retirement years?
• Do you have a retirement plan that offers tax benefits?

Unexpected Expenses

• Do you have a financial cushion to cover potentially expensive unexpected events?

Market Fluctuation

• How will your portfolio returns fare once you retire?

Inflation

• How much will the purchasing power of your dollars erode over time?

There is a lot to consider when determining how far your retirement account balance will take you, and many answers to these questions are subject to an individual’s lifestyle choices or unique circumstances.

Inflation inevitably saps the purchasing power of your dollars over the years.

Inflation and Purchasing Power

What you have set aside—and coming in from Social Security and maybe a pension—is only part of the picture. The next question is what happens to that money once you retire. How long it will last? That's why you need to factor in inflation and its effect on purchasing power. Inflation erodes the purchasing power of a dollar, meaning that over time a dollar buys less because prices climb higher. In extreme cases, an economy may experience hyperinflation, although the U.S. has not experienced that in recent memory.

For example, if you purchase a can of soda for $1 this year and then purchase a can of soda next year for $1.05 (same brand, same size), inflation is five cents, or 5%, during this one-year period. Because your dollar no longer buys the same amount of goods, you have lost five cents worth of purchasing power. The same principle can be carried over to your $1 million hypothetical retirement account balance. Because prices generally increase over time, your money could buy more 20 years ago, or even 10 years ago, than it could buy today.

The effects of inflation become more noticeable to consumers over time. As such, $1 million could buy even more back in 1990 than it could in 2000 and more in 2000 than in could in 2010. Because inflation can erode your ability to purchase goods and services, it is important to figure inflation into your retirement planning goals: The higher the rate of inflation, the less purchasing power you will have over time.

Purchasing Power in the Future

Seeing how purchasing power might change in future years requires making assumptions regarding the future rate of inflation. Government agencies, such as the U.S. Bureau of Labor Statistics (BLS), measure inflation using several methods, including the Consumer Price Index (CPI). Annual changes in the CPI can be used to estimate how purchasing power has changed over the past few years. For illustrative purposes, we will use the average annual change in the CPI from 1998 through 2018, which is 2.2%, as our “normal” rate of inflation.

Assuming a 2.2% annual rate of inflation, if you had $1 million in 2019, you will only be able to buy $780,000 worth of goods in 2029 (in 2019 dollars). The longer your time horizon, the more pronounced the effects of inflation. That same $1 million from 2019 would only be able to buy $560,000 worth of goods in 2039 (in 2019 dollars). Remember, the rate of inflation varies from year to year, and higher inflation results in lower purchasing power over time.

The Bottom Line

Inflation is an important factor to consider when establishing your retirement targets. Because changes in the world economy or in your personal circumstances can occur at any time, it is important to evaluate your assumptions surrounding your retirement goals on a regular basis (annually, at the very least).

Remember, $1 million no longer buys what it did back in 1990 or even 2000, and this magical number will continue to lose its luster over time due to price increases. Don’t let Inflation devour what you thought was a secure nest egg. These days, when it comes to a comfortable retirement, to paraphrase novelist Jacqueline Susann, it’s more than likely that $1 million is not enough.