Money Magazine posted an interesting article this morning that serves up a good dose of reality.  

How much do you think that you will need to retire? One of the biggest flaws in personal financial plans is the lack of realistic goals. Most people save money and invest money for this vague goal of the day that they can declare financial independence from working.  

To compensate, the random number target is selected. “I want to save _?_ million dollars. That should get me by.” Of course, any number with 6 zeros following it sounds like a lot of money. However, a million dollars today is not a million dollars say 30 years from now.   Inflation gets in the way. If we had 2% inflation a year for the next 30 years, you would need a little over 1.8 million to equal today’s equivalent of $1,000,000.  

Then you have to factor another angle into that target amount. How much can you draw off of your investments and have that money last for a lifetime? When you start figuring up the answer to those questions, a few other reality checks appear.

Your first reality check appears when you have to be realistic about how much you can withdraw off of your investments. The prudent answer to that withdrawal percentage is 4 to 5%.   So if you retire today, $1,000,000 would produce 40 to 50,000 in income. That is your first reality check. A million dollars doesn’t go too far when it comes to producing an income. The second reality check is that inflation doesn’t go away. Thus, you still need to make an additional 2% on top of the 4 to 5%. Given what has happened over the past 12 years that becomes a little more challenging for most.

Now, don’t be discouraged when you think about those prospects. The reality is that you can get creative with planning your income and make your investments work harder for you. Plus there are other variables to consider such as the more than likely assumption that income needs will decrease as we age.

Psychologists called this tendency to over- estimate the value of future dollars “money illusion.” So how do you conquer money illusion?  

It is actually quite simple. The key is that you start off being realistic about your situation. To do that, it is critical to factor in all variables and get as close to an actual attainable goal as possible. Reality is a tough thing to connect with. You can spend years avoiding reality and avoiding the pain that can go along with reality. However, think of it this way. Facing reality today is going to be much less painful than facing reality when you have no choice.