Over at ABC News columnist David McPherson is responding to some reader backlash stemming from an article in which he used an example of somebody retiring with $500,000 in an IRA. The readers accused him of being out of touch with reality. Well, rather than apologize, he’s upped the ante. Now he says you’ll need $1 million to retire.
The days when an employer will guarantee you a monthly check upon retirement are fading away fast.
You’re on your own, and you better wake up to that fact.
If you’re retiring within the next few years, there’s still a decent chance you will collect a guaranteed pension. But unless you’re a government worker, 10 years from now there will be few retirees who can count on one.
That’s why you need $500,000 or more.
David suggests you try to meet this goal through your employer’s 401k plan. (Um, assuming you have one…)
For most workers, the best way to do it will be through your 401(k) plan. The combination of tax deferral, an employer match and automated payroll deductions make the 401(k) the best savings vehicle for most workers.
Let’s say you’re 30 years old, earning $50,000 a year and are 35 years away from retirement with nothing saved so far. Contribute about $246 a month, and at a 7.5-percent average annual rate of return, you would reach the $500,000 goal. That contribution amount is equal to about 6 percent of your salary.
Throw in a 3-percent match from your employer, and you would be on track to reach $750,000 at the same rate of return. Assume annual salary increases, and these numbers will look even better.
The key is to save early and often. If you do, you’ll have $500,000 before you know it.
How’s that for a reality check?
What do you think of this? Are you on track to retire with a million bucks?
Why You Need $1 Million to Retire [ABCNews]
(Photo: saramarie )
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@jdmba:
Tell me about it… I put 14% into my 401k and every paycheck I see my 401k DECREASE, thus earning me about -15% over the past 9 months. This is diversified across large cap, midcap, and international. I know that 7.5% number is long term, but damn, its kinda sobering see that on your first job…
@dakotad555: Ya I’ve considered that. My savings account earns 2.5% right now. Before the prime rate crap, it was earning 5.5%. Which is great for savings. The reason I don’t put it in an IRA or even a CD/stock market is because its “retirement” and “savings”. If I have an emergency, I can withdrawl quick.
I have the 401k for retirement as well. If no emergencies happen, I’ll probably take a chunk of the savings and put it somewhere else. I’m just trying to keep atleast 6 months pay in savings for emergencies.
Eh, I don’t care about saving over a million or more.
I’ll probably have to work until death prevents me from doing so. I’ll save some money though so that family members can split the sum and run though.
I’m on track to retire with $1 million, but I doubt it’ll be enough anyway :-p
@Bladefist:
Every time I try to do that, I have an emergency.
The best way to beat the system is to become a do-nothing public employee as soon as possible and avoid the DREADED PRIVATE SECTOR altogether. It helps to know someone (preferably a relative) who can grease the skids and show you how to work the system. The key is to maximize your top-earning years to obtain the largest possible pension. Assuming you don’t commit a felony, you can retire in 20 years and earn a 70% pension and low or no cost health care for the rest of your life all thanks to those hard working jokers paying taxes. If you’re really clever, you can “retire” even earlier on disability by claiming to be injured on the job. Ask around for the name of a friendly doctor.
For case studies: see Massachusetts
To all those laughing at a 7.5% ROR, the average return of the S&P 500 since 1926 (the year the S&P 500 was founded) is about 11%. The key is to look long term. As many have stated, you must buy high and sell low. It is human instinct to pull money out of the equity market when prices have tanked, but now is the time to load-up.
Throwing money into the bond markets is no cure right now either, long term-money is making basically nothing (relative to historical yields) and to be honest the smart money is either picking up some cheap stock, or for the more risk-averse, waiting in cash and short-term fixed income until yields improve.
@Bladefist: The annual limit for a Roth is about a third of the 401k limit, $5000 this year, increasing at $500 a year here on out. I’d recommend:
1) Max out 401k matching contributions
2) Max out annual Roth contribution if possible
3) Max out annual 401k contribution if possible
This works out to be $20,500 for 2008, so that’s definitely not easy. But at least $15,500 of it is pre-tax. If your company matches 5% and you make $50,000, achieving 1 and 2 would be $7,500, which is do-able for a lot more folks.
@Johnny Blackshoe: Which is exactly why you don’t just put your money in one type of investment. You diversify to make sure you don’t lose everything.
All I have ever done has been 401k and employer matching. But I waited until I was six years into my career, at age 30, before I started pulling money out of my paycheck into a retirement fund. Twelve years later, I wish I had started sooner.
The numbers being thrown around for a “comfortable” retirement can be intimidating, obviously. But IMO, you need to start somewhere if at all possible. Start small, with whatever you can. Saving something, anything, is better than not doing it at all. Even if you never invest it, at least start saving. Rainy days will come.
People with little room for error should begin conservatively with smart, low-risk investments. As the principal grows, you can branch out into areas that offer higher rates of return.
Bottom line, IMO: Start saving as soon as possible. Work at your principal over time. Always stay informed, especially about the markets and the economy. Keep your investments timely and diversify when possible.
I just started my 401k. I’ve contributed $100 a week for 3 weeks. I just got my latest statement. I have $293.
WTF?
@Raanne: I don’t really trust “Financial Guy” as his goal is to get you to give him as much money as possible.
I plan to retire to a tastefully decorated shopping cart whilst dining on gourmet cat food.
@Secret Agent Man: I think you forgot to add “**Past results do not indicate future performance”"
@harvey_birdman_attorney_at_law:
Welcome to the recession!
The fees on my retirement plan bug me. I mean most everything was negative, some were positive, but the fees seem to eat into everything so my retirement funds are basically stagnant or shrinking from month to month. That 1-5% fees compounded over and over again really do eat into this stuff over the years. I would sacrifice the ability to have so much choice if the fees were slashed.
@Tmoney02:
You sound like my legal department.
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How’s that for airtight?
I think I did the calculations. If I were to retire today and have the same “salary” for the rest of my estimated life, with no change other than for the rate of inflation I need 1.7 million (today) or 2.6million when I’m retirement age. I’m 29. My mother, who is 45 and has a similar salary would need 1.3 million today to retire.
Either way, I figure I’ll be working until I drop *shrug*
@Secret Agent Man: lol well done. I believe my services are no longer needed. A bid you good day sir.
Its hard to put money into retirement when one is just getting by with increased health care costs, mortgage rates, gasoline, food, and other assorted costs, while still paying off student loans. And not everyone gets employer matching on a 401(k).
When my retirement money runs out I’ll just turn myself over to the corporations and have them turn me into Soylent Green.
I don’t plan on getting that far, but I’ve got my just in case plan enabled anyway. According to this, I’m ahead of schedule. Hooray.
Inflation adjusted, Id actually shoot for about 4 million dollars to retire ‘comfortably’.
$1,000,000 is nice today, but in 10 or more years 1 million $ wont even put gas in your Cadillac.
@RodAox: It’s sobering to think the money we’ve invested exists only as numbers to us. We’re assuming there will still be an entity in the future that recognizes what a 401(k) is.
@Jevia: I think I made the comment somewhere else on Consumerist that the number of permanent, full-time positions with benefits in my industry has dropped. Companies instead rely on contracters and freelancers so they don’t have to pay for all of that “feel-good” worker stuff. Much less a matching 401(k).
Things are always rosy for these financial gurus. Housing is always affordable, higher education is within reach of anyone who wants to learn, no children are born with disabilities, and no one gets cancer.
@harvey_birdman_attorney_at_law: Consider yourself lucky. I’m putting in a lot more and have lost $2K in the past quarter. The more you invest, the more you have to lose.
I forgot to mention natural disasters.
@chiieddy: The key there is to have moved some of your money into equities. With life expectancy today, financial advisors are recommending that retirees keep more in equities longer.
This is, however, one area in which a mildly-managed mutual fund makes sense for many people: Putting a good chunk of your retirement money into a lifecycle fund in your early 50′s or so is a good balance, for many people, between squeezing out every cent of return and not being able to sleep because of the markets.
@Speak: Disasters — financial, economic, personal, whatever — are the main reason you should put away some money, preferably somewhere it can make you more money. It doesn’t have to be in some complicated investment plan or snobby real estate deal. Just save a small percentage of each paycheck and the money will grow. Then it will be there when you need it, for whatever reason.
I don’t disagree that a lot of these so-called gurus act like everything is gonna be sweet if you just listen to them. It pisses me off that they tell you how to make more money by investing “their way,” but the way they’re making money is by selling their “secrets” to you.
I don’t buy into it. I say just do it your way, to whatever extent you believe you can.
@knyghtryda: Heh, I rolled my 401(K) over into an IRA about three years ago, and it’s now worth less than when I started. I’m hoping this isn’t the 1920s all over again…someone who bought into the stock market in 1929 would have had to wait about three decades just to break even.
Incidentally, 401(K) plan fees are sure a ripoff. I didn’t realize how high they were until I did my IRA rollover. My fees were three to four times higher for the same index funds in my 401(K) than they are in my IRA. It’s almost criminal, but the fund managers can get away with this because 401(K) participants are a captive audience.
@SadSam: I don’t doubt that government pensions are overly generous in some areas, but you have to keep in mind that in many places those jobs also pay less than comparable jobs in the private sector. So in a sense people are just trading better retirement benefits later for a lower salary now.
It used to be most workers, private or public, got a defined benefit pension and it wasn’t expected that every Tom, Dick, and Harry would have to try to learn to be an investment expert. I’m not convinced te current system is a step forward; I think a lot of people are going to be in a very difficult position in 20 or 30 years because they simply didn’t know where or how much to invest.
My retirement plan is to marry Investment Cat and live off his $$$$. Meow.
Make sure you allocate about $18,250 extra per year. Because by the looks of what I see at the local convenience store, you’ll be buying cigarettes and lottery tickets by the truckload once you hit 60.
How the hell can you people say $1 million is not enough to retire on? That’s $50k/yr for 20yrs. I guess it depends on your living location, but still. I can live normally on $12-15k/yr, with $50k available, I think I’d spend all my time on vacation.
Retire? What is this thing you speak of?
Like any of us are going to ever have enough to actually *retire* on.
Social Security will be gone.
Dollars saved today may look nice but will essentially not translate into dollars of the future.
I sincerely doubt any of us — unless you’re already making big bucks — will ever be able to kick back for decades on end and just take it easy. I also think we’d be bored senseless after a relatively short period of time.
I can afford cheezburger?
Yay! Investment cat!
@Triterion: It’s much worse than that. According to “the rule of 72″, 3% a year means a doubling in just 72/3 = 24 years, not 35. If you run the numbers, it turns out to be about 23.5.
A million???? I’ll be lucky if I have $50,000 by the time I retire.
Come on, folks..start practicing with me now….
“Welcome to Wal-Mart. Welcome to Wal-Mart”
“Hi, Welcome to McDonald’s”
@unleashed: How the hell can you people say $1 million is not enough to retire on?
Ideally, you want to live off the earnings, not the principal. USAA’s retirement calculator told me I’d need $1.8m to “finance my retirement lifestyle” (about $47k/year). I’ll save that much to leverage the tax savings, but I don’t know about retirement. It just sounds so boring to me:
Q: “What do you do these days?”
A: “Play golf and watch TV. I’m just waiting to get the fuck out of here.”
@oyvader: Who retires at 55-60 aside from dotcom millionaires?
Teamsters.
@Bladefist:
You’re not supposed to rely on SS. It’s an insurance program, not a retirement program.
I wonder why nobody mentions more the prospect of retiring overseas? I can assure you that you won’t need a million dollars to retire in nicaragua, or thailand, or somewhere like that. And, all things considered, you might well have a much higher quality of life as well…
My wife and I are saving like mad for retirement, roughly 20% of our income goes into various 401′s and IRAs. That said, even if we do make it to one of these big numbers, we’re going to get raped in taxes down the road thanks to all the baby boomer pukes who haven’t saved a dime. They have the numbers, they’ve never once taken responsibility for themselves, and they’ll vote the rest of us into penury to pay for THEIR retirement.
Government workers.@oyvader:
Believe it or not, not everyone wants to leave a neighborhood where they’ve lived for 40 years and move at age 65 to a Thai village. Hard to imagine I know.@zyodei:
It’s true. If you are in the 30 years or under age bracket, you’d better brace yourself for a generational war. The baby boomers haven’t saved diddly as a group. Ten years from now when they all need hip replacements and don’t have a dime to their name, they’re going to be looking to the younger generation to pay for it.@buckfutt:
Because developing nations with low or no taxes also have the kind of public services you associate with developing nations with low or no taxes. Not everybody wants to have to live in a gated compound because there is no real police presence, or wants to pay cash and have a private LifeFlight plane available because it’s four hours by dirt road to the nearest thing approximating a hospital.
What scares the hell out of me is that for me to save a million straight up, it would require 20K a year in savings and that is absurd on my salary. That’s a little less than HALF of my salary. Obviously I won’t make this salary for the rest of my life and I will eventually get married and have investments going, but it’s still a sobering thought and helps keep my debt very low. I also started increasing my 401k percentage rate every 6 months when they have open enrollment/changes. Something is better than nothing.
@unleashed: because if you’re under 30 now, retirement is another 50-something years away and who knows what the cost of living will be or what money will be valued at then? By then a million could be bubkiss.
@orv – While that has always been the logic to the whole “public v private” employment debate, I can tell you from personal experience that government employees are WELL compensated (Mom is a State worker, Dad a county, and fiance a fed).
For the love of crap, my parents each make around 100k and my mom doesn’t even have a degree. My fiance is getting another bump to a higher grade (one of those cool “ladder deals” and will be making in excess of 65k, at the ripe old age of 25 after randomly applying for an internship in an office that had no correlation to her major) and that’s before this year’s COLA.
In my field (accounting) sure, I can/could make more in the private sector, but the hustle is much harder, and in this economy, the reward is much less. Accountants don’t bonus like sales people and those in the BMGT side of things (something to do with internal controls, blast!). If it wasn’t for all the time/energy/sleepless nights invested in getting my CPA finished up, I’d take a federal job no sweat.
I thought we’d all be underwater in 50 years! Baseline projections of how much a person will need to retire neglect the instability in the world which is hard to put in an equation.
As a state employee I don’t pay SS tax… Its awesome. The downside is that I won’t receive any SS benefits, but I don’t think that in 35-40 years anyone else will either.
Its hard to imagine what the world will be like in 40 years. I guess thats why people save money.
Well, I will need a little more than a million to buy a plane to fly straight into a volcano. That’s one sweet death…
Back in the 50s and 60s, when companies had retirement plans, somehow people got by just fine with one breadwinner. I grew up in the 50′s, and everyone on our street was middle class, took vacations, had a TV and a car, and got by fine.
Nowadays, even though we have a few more gadgets in the house, it takes two people working just to keep up, and getting the kids through college pretty much destroys your ability to save. And now that companies don’t have funded retirements, I figure that I’ll never get to retire.
Or… I’ll be in a big bunch of old fogeys living in cardboard boxes at the edge of the town dump in 30 years.