I doubt you’d turn down a $1 million windfall. But before you start mentally calculating all the things you could do with that amount of money, it’s important to realize that $1 million is no longer the gold standard for financial security and success. Why? It all comes down to inflation.
The Inflation Factor
Put simply, inflation erodes your money’s value. Inflation has often been nicknamed the silent retirement killer because so many people forget to account for it in their income planning. Unfortunately, inflation is one of the few certainties in life. Over the last 50 years, the cost of goods and services has increased an average of 3.7% per year. (1) Let’s say inflation continues to average 3% a year. In 40 years, $1 million will be worth $306,000 in today’s dollars, and that’s definitely not enough to buy you a comfortable 30-year retirement.
To put these numbers in perspective, let’s look at history. If you wanted to have the same purchasing power as a millionaire from 1914, you would have needed $3 million in 1980. But here’s the shocking number: in 2019, you would need $25 million to match the $1 million of 1914. (2)
Rising inflation tends to happen so gradually that it’s hard to see the effects of it on your wallet year to year. When saving for retirement, you need to calculate that effect forward anywhere from 10-50 years in the future. So if a new car costs around $5,000 in 1980 and $34,000 in 2019, you could find yourself spending over $65,000 to upgrade your vehicle in 2041. (3)
Shield Your Nest Egg From Inflation
We can’t predict the future, but we can prepare well based on historical data. Since you need your retirement savings to last as long as you do, implement these potential solutions in your financial plan.
Conservative Withdrawal Rates
Since you know that stocks have historically earned an average of 7-8% a year, you might assume that you can afford to withdraw 7-8% of the initial portfolio value (plus a little more for inflation each year). (4) But in reality, to protect against the uncertainty of the market, you may need to limit your withdrawals to less than 4%. (5) Because there is no simple, one-size-fits-all plan, you need to figure out what will work for you and your unique situation, taking various factors into account, such as time horizon, risk tolerance, asset allocation, and unexpected living expenses.
Set Up Contingencies
There is sophisticated software available to factor in inflation and calculate how long your money will last based on where you live, which withdrawal rate you choose, and what the markets will do. But there are some things a computer just can’t predict, such as your health.
According to the Employee Benefits Research Institute, the average couple at age 65 will require anywhere from $151,000 to $255,000 just to cover their healthcare costs in retirement. (6) Build contingency funds over and above your regular retirement account to give yourself a bit of a savings buffer. There will always be unexpected expenses in life, whether it’s needing a new car, home repairs, or unexpected long-term care expenses. Planning ahead will give you peace of mind.
Save More And Spend Less
The longer your planning horizon, the more resources you will need for retirement. The most obvious way to lower the risk of outliving your money is by saving more before you retire and underspending when you reach retirement. If you have any debt, focus on reducing it as much as possible so your resources can be devoted to saving.
Retirement often means major lifestyle changes. As a result, your expectations may need to change as well. If you want a comfortable retirement, you may have to rethink how much you will be able to give your children as a down payment on a house or an inheritance.
You may even need to downsize your home or relocate to a more affordable area. Cost of living varies drastically across the U.S. When you are determining how much money you need for retirement, location can make all the difference. For example, if you live in West Virginia, $1 million (in today’s dollars) will only last 22 years and 6 months. But if you live in Mississippi, it’s estimated that $1 million will last almost 26 years because of affordable living expenses that fall below the national average cost. (7)
Stay flexible and be willing to make adjustments in order to secure your financial future and stretch your wealth as far as possible.
Secure Your Retirement
It can be disheartening to look at the numbers and realize that what you were aiming for is not enough. But by making small changes now and planning ahead, you can set yourself up to experience the retirement you dream of. Use these pivotal years to implement strategies to protect, grow, and transfer your wealth. If you want a customized financial plan to get you from point A to point B, Beacon Wealth Management is here to help. Reach out to us now at (304) 626-3900 or email me at email@example.com and start living your life instead of worrying about the future.
John Halterman, best-selling author and nationally published blogger has been featured as a financial guest expert on the shows of self-help gurus Brian Tracy and Jack Canfield, author of “Chicken Soup for the Soul” and has appeared on ABC, FOX, BRAVO, NBC, CBS and A&E. John is the expert host of the weekly WDTV News 5 segment, “Solutions 4 Financial Independence”.
As an authority on wealth management, he has been invited by hundreds of institutions such as universities, federal agencies, professional associations, and large energy and utility corporations to be a guest speaker and educational event host. Event topics include retire ready, managing down market investment risk, how to reduce your tax burden, and transferring your family wealth in the most tax advantageous way.
John is the founder and owner of Beacon Wealth Management, specializing in helping entrepreneurs, professional practitioners and retirees overcome the 5 major challenges facing success families. He is a warm communicator with a passion for helping people transform their financial futures. John understands the multifaceted set of financial worries people face as they become more successful and enter the retirement redzone. He empathizes personally with each client and delivers a collaborative client experience that empowers people to reach their life goals.
With more than two decades of experience, John’s professional credentials include Certified Wealth Strategist, Accredited Investment Fiduciary, Certified Estate Planner, Chartered Federal Employee Benefits Consultant, Professional Plan Consultant and Registered Financial Consultant. He is also a past member of Ed Slott’s Master Elite IRA Study Group.
A native of Weston, West Virginia, John served in the United States Air Force prior to becoming a Wealth Advisor. Today, he resides with his family in Clarksburg, West Virginia. He and his wife, Lisa, have been married since 2005 and have three amazing children. A family-oriented man, he enjoys giving back to his community, coaching youth sports, landscaping, architectural design, and playing racquetball.