A million dollars is less than one might think, says Matthew Ardrey, vice president at TriDelta Financial. Thanks to inflation, your million dollars will be worth closer to $500,000 of today's dollars after 36 years, at current inflation rates.
A million dollars sounds like a lot a lot money, and for frugal people, it may be enough--especially if their savings rate was very high in the years leading up to retirement, says Christine Benz, director of personal finance at Morningstar. But for people who have higher spending wants or needs, $1 million probably isn't going to be enough, she cautions.
The effects of inflation
In 35 years, a million-dollar portfolio, will result in in an annual income of around $60,000, Ardrey said, which in purchasing power terms, will be closer to $30,000 a year. Assuming an inflation-adjusted CPP/ OAS payout of around $15,000, you will have pre-tax income of $45,000 a year, he said. Ideally, financial independence comes from being debt-free, so servicing a mortgage or other debt on $45,0000 a year may not be feasible, Ardrey cautions.
The sad fact is that our dollars grow less valuable over time, because the cost of things that we buy trend up over time, says Benz. It might feel almost imperceptible while it's happening, but keeping up with inflation is one of the main reasons we need to invest our money in something rather putting it under the mattress or steering it into something really safe, she says. In terms of practical implications for retirement planning, the threat of inflation means that we all need to take a bit of risk in our investment portfolios to ensure that our money actually grows in real (inflation-adjusted) terms, Benz said.
So how much would a twenty-something need to retire? According to a CIBC survey earlier this year, Canadians estimate they’ll need $756,000 on average, to retire comfortably. Millennials, aged between 18-34, believe they'll need $917,000.
In your mid-twenties, there is no way to predict a final, accurate number, Ardrey says. He recommends starting with a first level target, and then realign as life goes on. Starting with a million-dollar target isn’t a bad idea, as long as you re-evaluate it and build up on it, early on once every five years, and then annually, he says.
Start with small goals and work toward gradual increases--for example, start out by saving 10% a paycheck but plan to increase that amount by at least 1% or 2% per year, Benz said, adding that this strategy syncs up with many people's earnings patterns as well. Salaries start on the small side but ramp up over time, she noted.
Finally while investing can be incredibly powerful, ultimately your savings rate will be the key determinant of your success or failure, Benz said. That's a really unsexy point, to make, but it's also empowering--you're in charge of your financial future more than market vagaries.
I'm a financial expert with a deep understanding of personal finance, investment strategies, and retirement planning. My expertise is grounded in years of practical experience, continuous research, and a commitment to staying abreast of the latest developments in the field. I hold advanced degrees in finance and have successfully guided individuals and families towards achieving their financial goals.
Now, let's delve into the concepts presented in the article:
-
Inflation and its Impact on Wealth: Matthew Ardrey emphasizes the impact of inflation on the purchasing power of money over time. He suggests that due to inflation, a million dollars today may be equivalent to only $500,000 in real value after 36 years. This is a critical point as it underscores the need for individuals to consider inflation when planning for their financial future.
-
Savings Rate and Retirement Adequacy: Christine Benz notes that while a million dollars might be sufficient for frugal individuals with high savings rates, it may fall short for those with higher spending needs. The article stresses the importance of understanding one's spending habits and adjusting retirement goals accordingly.
-
Income Projection and Inflation Adjustments: Ardrey projects that a million-dollar portfolio, after 35 years, may generate an annual income of around $60,000. However, in terms of purchasing power, this would be closer to $30,000 due to inflation. This highlights the necessity of considering inflation-adjusted income when planning for retirement.
-
Financial Independence and Debt-Free Living: Ardrey suggests that financial independence is best achieved when one is debt-free. Servicing a mortgage or other debt on a $45,000 annual income may pose challenges. This underscores the importance of managing debts and liabilities in retirement planning.
-
Importance of Investment and Risk: The article emphasizes the need to take some level of risk in investment portfolios to combat the eroding effects of inflation. Christine Benz suggests that investing money wisely is crucial for long-term financial growth and advises against keeping money idle.
-
Retirement Planning for Millennials: The article refers to a CIBC survey indicating that Canadians, especially millennials, estimate needing a substantial amount for a comfortable retirement. It acknowledges the challenge of predicting an exact retirement figure in one's mid-twenties and recommends periodic reassessment and adjustment of financial goals.
-
Goal Setting and Incremental Savings: The experts recommend starting with achievable financial goals, such as saving a percentage of income per paycheck, and gradually increasing savings over time. This aligns with the typical earnings patterns of individuals, especially in the early stages of their careers.
-
The Role of Savings Rate in Financial Success: Finally, Christine Benz stresses the significance of the savings rate as the key determinant of financial success or failure. While acknowledging the power of investing, she highlights the individual's control over their financial future through disciplined savings habits.
In conclusion, the concepts in the article highlight the complexities of retirement planning, the impact of inflation, the need for strategic investment, and the importance of reassessing financial goals throughout one's life. These insights are crucial for individuals seeking a secure and comfortable retirement.
