You Might Need $3 Million to Retire at Age 65

You might need $3 million to retire at age 65 (if you are 28 years old today, which I am). See how I came up with that number below.

The purpose of this post is not to scare you into thinking you’ll never save $3 million dollars. It’s to expose you to how to think about how much you need to save for retirement. You might not need $3 million. But how much do you need and how do you calculate that?

Most people have no idea how to save for retirement, how much to save, where to save that money, etc. In everyone’s defense, there seem to be a lot of questions and it seems daunting to learn. But in reality, it is not that difficult to invest your money for retirement. I have already written a blog post about how you should invest in a target date fund in your 401k (as much as you can a year) and call it good. You (may) not need any other investments.

But a good question people should have is “How much do I need to save for retirement?”
If you were to retire today some people say you need $1 million.
That number is created by using the 4% rule, meaning you can withdraw 4% of your money a year to live off of. $1 million x .04 = $40,000 a year to live off of (plus social security).

It can also be called the 25x rule. This means you need 25x the money you will need each year to live saved. If you want to live on $40,000 a year 25 x $40,000 = $1,000,000

This is fine for today’s retirees, but for people between the ages of 20 and 30 we might have a different number to shoot for.

We have to consider inflation. To account for inflation any number of year from now there is a very simple formula.

1.03^37 = 2.98 

(a quick review of powers, 1.03^37 means 1.03×1.03×1.03… 37 times)

$1,000,000×2.98=$2,980,000

What do the above numbers mean?

.03 shows an inflation rate of 3% per each year (which is a historical average of US inflation)

37 = 37 years in the future (when I’ll be 65)

2.98 gives you the answer of how much less money will be worth in those years (inflation).

So 37 years from now it will take $2.98 dollars to buy something that costs $1 today.

So you can take today’s money $1,000,000 and multiply it by the inflation rate 2.98 and get that you’ll need $2,980,000 (or basically $3 million) in 2054 to equal $1,000,000 today.

And that is why you might need $3 million dollars to retire.

So the basic formula

1.03^ (years until you turn 65) x how much you want to live on per year in today’s dollars x 25

Example:

(1.03^37) * $40,000 x 25 = $2,985,226

This means you would need $2.9 million dollars ($3 million) to retire.

Of course, this doesn’t take into account the fact that many basic services of today like food, healthcare, housing, transportation, will likely cost less in the future. You might not need near this much saved! But then again, you might. It never hurts to over plan. If you find yourself in a position with too much money you can always give it away.

I don’t want to scare people away from saving for retirement if they don’t think they’ll have $3 million. As this CNN article says, even though a lot of people say $1 million today the average person who’s 65 only has about $148,000 saved which would be $148,000 x 2.98 = $441,000 if you were to retire in 37 years. Now we agree that like CNN said, $148,000 is probably  a little low, but not starving low. So you likely want to shoot for between $441,000 and $3,000,000. Use the rule of 25x to think about how much you might need to withdraw from your investments but also remember to account for inflation!

If anyone would like to review their own personal retirement numbers with me don’t hesitate to contact me. I really enjoy reviewing these numbers with anyone.

Enough

“Some people are so poor all they have is money.” – Bob Marley (or Abe Lincoln, the internet will never know)

I was having lunch with some colleagues at work today. Of 6 people, 2 had done PhD work and the rest held Bachelor’s degrees, engineers and computer science folks. A few were talking about how they were in the wrong business and they wanted to get into something where they made more money. They decided that $300,000 a year was a place they could feel comfortable at. I almost fell out of my seat!

I am a mechanical engineer in the midwest I keep my expenses relatively low and I have a pretty good paying job, although nowhere near $300,000 a year.

I started the year with 3 concrete goals.

  1. Save $100,000 in my retirements accounts (cumulative, not this year alone!)
  2. Get a mentor
  3. Do 100 push ups a day

There are more but I haven’t structured them well enough to be shared yet.

Of the above I am already thinking about if the first one, have $100,000 in retirement account by the end of the year is a useful one or not.
I am 26 years old.

Having already saved between my 401K (pre tax), ROTH IRA (post tax, limit $5500/year) and HSA (Health Savings account) $75,000 as of Jan 1, 2015 I would have to save $25,000 to reach $100,000 by the end of the year. Now that is do-able but I am starting to question if that is a good goal or not.

If you have looked at anything I have done in the past you will see that I like to project forward. Here is how to “Retire A Millionaire, The Easy Way”.

Using the various numbers I already calculated from there (7% growth a year, 3% inflation) and the $75,000 I already have invested, that puts me at $1,049,612 at 65 years old (39 years from now), yielding $72,420 a year (at 7%) which is equivalent to $22,866 a year in 2015 dollars. Now if I was getting $23,000 a year for free what would I be doing? Probably anything I wanted! (This is before social security, assuming it’s still around).

You would calculate a future value using the below equation.

FV = PV*(1+r)^t

FV = future value of lump sum  

PV = future value of lump sum ($75,000)

r = interest rate per period  (7% = .07)

t = number of compounding periods (39 years)

FV = 75,000*(1+.07)^39 = $1,049,612

I’m a millionaire! time to start living like it!
Of course this equation is making plenty of assumptions based on the numbers I put in. Last year certainly did not return 7%, but again, referring to the previous article, there is good reason to assume 7% average over the long term.

This makes me question why I would even put any more in my retirement account? It already seems that I have enough! Now I will continue putting money in retirement accounts as long as I can not think of any other ways to invest it, certainly don’t take this as me telling YOU to stop investing in your retirement!

The next question is why do people live the way they do?
Do people really understand the simple math I laid out above and in my other article about how to calculate future and present worth?
Do people understand how to calculate a return?
Do people understand inflation?

Now I certainly don’t live like a king. I have monthly expenses of about $1200 and drive a used (2007) Prius. It’s reliable. Having taken the time to learn about finances from The Crazy Man In The Pink Wig and understanding the answers to the questions I asked above, I am very confident. I’d suggest you read one of his books, preferable “What Color Is The Sky?” I’d even purchase and mail it to you as I have done for many others, if you like. (Drop an email at hooglandaxel@gmail.com, or comment below!)

That all being said, back to the thought of enough. What does that mean? I guess each person has to figure that out for themselves, but it’s certainly something we should perhaps put a bit more thought into than we often do!

What is your “enough” number?
If you want to talk to me about what is enough, comment or drop me an email.