The other day in a magazine, I saw a section that was talking about how $1,000,000 is now sort of like a new minimum to have for retirement purposes, at least among the American population that wants to retire with middle or upper class incomes.
Now, this is a little silly in some ways but it does make some sense. I see how, in an era where every investor and their mother is complaining about low interest rates* a relatively large amount of assets would be required to pump out sufficient investment income to live off of. Also, a million dollars is not what it once was –a millionaire in the 60’s is akin to a multi-millionaire or decamillionaire today. Inflation is the ever present invisible tax that steals our purchasing power over the decades.
It’s become apparent that today in America the traditional “three legged stool” of retirement planning has gone out the window. This model basically states that in retirement, workers rely on three sources of income to sustain themselves: a pension from their job, social security checks, and their own savings.
It’s no secret that pensions are almost extinct these days. Social security is..well…it’s heading in that direction. And personal savings? Yeah – don’t count on that either. As I mentioned in Tuesday’s post, the vast majority of Americans have had savings rates around 5% or worse for the last few decades. This leaves no legs to stand on for many people. A lot of folks that retire unfortunately have to rely exclusively on their social security checks for income, and maybe have a part time job on the side to help augment that if they can still work.
Back to the million dollars – if you can honestly live a frugal lifestyle and be very efficient with your spending (like Jacob Lund Fisker or Mr. Money Mustache), than a million dollars is way too much money. If you can live off of $25,000 per year, you only need to pile up $625,000 in a portfolio yielding 4% for you to generate that investment income.
$25,000 is really not that unfeasible for a small family with no debt whatsoever who lives in a medium to low cost of living area. As a recent college grad, I can testify that this is possible. It’s just that most people aren’t willing to live off of that amount of money. Heck, I’m not willing to live off that amount of money.
I’ll be straight here – I want to be wealthy. For some people $25,000 can buy everything they want and need. I know I’d rather prefer more luxurious things, so guess what – I’m going to have to save more than $1,000,000 by retirement age, especially after inflation takes it’s bite.
Because pensions are almost non-existent and the elimination of social security benefits isn’t far behind, it falls on the individual to determine their financial fate over the course of their life. The game has changed – it’s now a one legged stool and it’s all on us.
I am seriously worried about the cultural changes that have taken place over the generations with regards to how we view managing our financial affairs. People who lived through the Great Depression learned the value of thrift and how to make the most of what they had. People who grew up in the post-World War II era worked hard to fuel the economic boom that occurred in our country at the time.
Now, it seems like the advertised goal in life is to seek immediate satisfaction and convenience. I’m worried that about the people my age who haven’t yet thought about the three stools of retirement – they’re too busy living life for today.
If the baby boomer generation is having trouble retiring and they actually had pensions, social security, and a little bit of savings to count on, how will my generation pay for retirement with much easier access to credit, no pensions, a failing social security system and poor saving habits?
Only time will tell, but if we continue to do what we do as a nation financially, I can’t help but see another type of retirement crisis on the horizon three or four decades from now unless something changes among the habits of America’s youth.
*or jumping for joy if you’re a real estate investor