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Does This Number Impress You?

This article was written by in Financial Advice and Advisers, Saving. 11 comments.


Do you consider someone with a net worth of $400,000 rich? Well-off? Comfortable? Would you set a lifetime goal for yourself at $400,000?

Actually, a net worth of $400,000 sets you well above the median net worth in this country, and in the world, to say the least. But these statistics don’t matter… what matters is your immediate environment. In your immediate environment, could you give up working once you have $400,000 when you subtract your liabilities from your assets?

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Dr. EvilI think many people will say “no” to this question, yet they’re willing to set a goal of $1,000,000 in the future — say, 30 years from now. $1,000,000 sounds much, much better than $400,000. With $1,000,000, one might be able to stop working and live off the income. At a 4% safe withdrawal rate, that’s $40,000 a year.

This is why some financial planners, some columnists, and even some bloggers are big on telling people what they can do now (how to invest) to increase the chances of ending up with $1,000,000 thirty years from now. It’s simple: invest $8,250 a year, invest in stocks, and pray for good markets at the end of the time period and a yearly average of an 8% increase.

The huge problem with this model is the fact that it completely ignores the effect of inflation. Assuming a 3% inflation rate over the next thirty years (it could be higher or lower, who knows, but this is a historical average), your $1,000,000 then will only be worth what about $400,000 is worth now.

By the time you’re a millionaire, a billion dollars may be what is needed for the “comfortable” life. With $1,000,000 in the bank, at the safe withdrawal rate of 4%, you’ll be living off the equivalent of today’s $16,000. (For that safe withdrawal rate — the amount you can withdraw while not depleting your funds over time — it’s assumed the money will be invested in the stock market, not sitting in a bank.)

Methinks you should strive for something well beyond $1,000,000 if your time horizon is 30 years.

Updated September 24, 2015 and originally published May 31, 2006.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 11 comments… read them below or add one }

avatar 1 Anonymous

I *love* the Dr. Evil pic!

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avatar 2 Anonymous

I fail to see how any sensible retirement plan can fail to take into consideration the effect of inflation (using “inflation” in the sense of an increase in the cost of living rather than an increase in the money supply). As your example shows, even a relatively “low” rate of inflation can have a huge impact on the real level of income in retirement.

A related point to consider is what is the rate of inflation? The CPI numbers are generally regarded as understating the true rate of general consumer price increases. Also, in the context of retirement planning you need to consider whether the general rate of price increases is representative of the rate of increase in your personal living expenses.

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avatar 3 Anonymous

First, great post in terms of hitting a key concept.

Second, we have a net worth of over 400K and certainly do not consider ourselves well-off. We worry about job security, we worry about the domestic and world stock markets, we worry about the impending insolvency of Social Security and Medicare.

Third, I had an experience of explaining inflation to a friend. She had a target net worth of 1.2M for retirement and I said “wow my target is 2.5M”. After digging a little deeper it turns out she had no inflation assumption but I was assuming 3% for 25 years, so in fact we ended up having nearly identical goals if we inflation-adusted her figure. Point is: your post may be a wake-up call to some.

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avatar 4 Luke Landes

Thanks for the comments Seattle, trainee, and brett. I also agree that the standard CPI numbers understate what I’ve been feeling and seeing as inflation. Gas prices do more of a number on costs of everything than people want to admit… and is purposefully left out of the core CPI.

Brett, thanks for your kind comment. I’ve also talked to people who sound so surprised and almost insulted when I say that I’m going to most likely need much more than $1,000,000 when I retire 30+ years from now unless I move to another part of the world.

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avatar 5 Anonymous

I did this same thing when I sat down awhile back to figure out how much I will need in retirement, I at first forgot to take into account inflation. It was pretty shocking how much more you have to save when you factor in inflation. I think most people out there don’t even think about it when they are planning for retirement.

As far as the CPI understating inflation, I totally agree. It has seemed as though the cost of everything is rising alot higher than 2 to 3%.

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avatar 6 Anonymous

Originally, I believed that 1 million dollars would be enough to live comfortably in retirement, but I had not accounted for inflation. I will have to adjust my retirement savings goal and my plan. Thank you for the valuable insight. Great article.

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avatar 7 Anonymous

I prefer to do my calculations in terms of the rate of return after inflation. What you pick for your expected inflation rate is a matter of judgement, but it means that you are assuming that your end numbers are stated in today’s dollars.

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avatar 8 Anonymous

What is really crazy about this is that you can amortize the $8,250 annually at a rate of 8% and get to nearly $1M in 30 years. And, even considering inflation, if you do not increase the $8,250 annual contribution, you can still get to $2.5M with little change.

First, amortize the $8,250 annual contribution with the same rate of 8%, but instead of 30 years, do 35 years. You will find it is more than $1.5M. Next, amortize the $8,250 annual contribution, but change the rate to 10% for 25 years. Voila! $2.5M!

The one thing that this does not take into account is that you should be increasing your annual contribution with each passing year. Maybe you should step it up based on a rate of 3%, similar to inflation. That alone will make a huge dent in the original amortization of 30 years at 8%.

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avatar 9 Anonymous

I’ve said this for along time, CASHFLOW is king, because at the end of the day, if you don’t have enough consistent cashflow, you can’t put food on the table.

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avatar 10 Anonymous


There is no retirement people.

The national debt goes up by 9.4% on average per year. This is it’s AVERAGE yearly increase since 1971. We’ll have a national debt of around 33 trillion by 2020 assuming we SLOW DOWN to that average rate – we’re above it now.

By 2030, the national debt will be over 70 trillion dollars.

The nation will be insolvent before 30 years. Probably in less than 10.

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avatar 11 Anonymous

While you make a point, there’s a lot wrong with this article.

A. 3 percent inflation is pretty high, the average is between 1 and 2 percent.

B. 400k over the course of 30 years would turn into several million, not one million if invested right. (Good mutual funds, Roth IRA etc.)

C. If inflation is growing at around 2% to be liberal and you get a 7-8% return on your money, over time you still earn at least 5%(adjusting to inflation)

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