Is a Million Enough to Retire On?
Pop Culture Finance writes article after article on how a person can become a millionaire at retirement. There is almost this fascination or badge of honor with being a millionaire in 25 or 30 years. I am always amazed at this type of writing because of its inaccuracy. Take this story as a an example: LINK
You start investing at 19 and contribute $2,000 to your account every year until you reach 27. From 27 to 65, you contribute $0.
From 19 to 26, you don’t invest anything. You start investing at 27 and contribute $2,000 to your account every year until you turn 65.
In the first scenario, you’re only saving and investing for eight years; in the second, you’re saving and investing for 39 years. Still, the person who starts at age 19 would end up with more money in their portfolio in the long run.
Assuming a 10% rate of return, the first person would have $1.02 million by 65, while the second person would have $805,185, a difference of more than $200,000. Here is what is misleading - a few things that they never point out.
They are assuming that the interest is steady and compounding. Since a 10% return is a little hard to find in that matter, you have to rely on the stock market. If you invested $10,000 into a Vanguard 500 index fund (VFINX) from 9/30/79 to 9/30/2019, you would have $739,220 and a 11.35% average return over the 40 year time period. If you took that same example and compounded it monthly over 40 years using 11.35% return, it would be $917,129.89. There is a big difference between those numbers. In addition, I would never run any planning numbers with that high of rate of return even if it was the case.
Then there is inflation. The question to ask is very simple. What is a $1,000,000 dollars in 40 years in future dollars with the effects of inflation?
$1,000,000 in 40 years with the effects of inflation is the same as $3,476,395.66. (according to a CPI calculator)
I recognize that the inflation numbers between 1979 and 2019 might not be the same as the next 40 years. However, that is not the point of the drill. The point is that $1,000,000 in 40 years won't even come close to providing the same as a $1,000,000 would today. It is misleading.
What is the best route to go? Do your own simple plan. In fact, we will do one for you. We don't charge fees for a simple plan. I have always felt that this is the most important step a person can take! A plan puts everything on your terms. To inquire, email Heather@prudentmoney.com.