Plan ahead. Work hard. Retire young.
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  • Retirement Millionaire

    How would you like to be a millionaire when you retire? Silly question, right - who wouldn't? But when you think about it, if you're a long way from retirement, you're actually going to need to plan on having quite a bit more than a million dollars, for three reasons. The first is inflation: a million bucks won't be worth anywhere near as much as it is now! The second is longevity; people are living much longer these days (and presumably will be living even longer in the future), so the retirement nest egg needs to last for a long time. The third is quality of life; if you're not working, you'll presumably want to do other things, and doing things generally costs money!

    Suppose you decide that you should be able to live well on $100,000 per year in today's dollars, and that you plan to retire in 30 years. At 2% annual inflation, you'll need to receive $181,136 per year at the start of retirement, and that will increase each year thereafter. To reach this goal, you have two choices: you can invest in an annuity or build up a sufficient nest egg to provide for that amount. Let's consider what it will take to reach the former.

    Suppose that you're going to invest in stocks returning an average of 10% per year until you retire, and then switch to a more conservative mix returning 5% per year. (Of course, you would really start getting more conservative as you approach retirement, but we'll do it this way to keep the math easy). If you withdraw 4% of your nest egg each year, it will keep growing and you can live off of it indefinitely. So you'll need to save up  $181,136 x 25 = $4,528,400 - a bit more than a million! As it happens, you'd need to save about two thousand dollars per month to reach this goal.

    That sounds like an awful lot of money, doesn't it? $24,000 per year. Of course, if you only need $50,000 in today's dollars to live on (a more realistic estimate for most people, considering that you should have your house paid off and no debt), then you'll only need half as much money and can do it by saving just one thousand dollars per month. Still a lot, but if you and your spouse are making a combined $60,000 (which is less than the $50k you want after you deduct work expenses), that's 20% of your salary..tough, but hopefully not undoable.

    Good luck!