Does anyone remember the days when $.86 bought a gallon of gas? (1) Or when a new home cost about $96,000? (2) Those were the same days that $1 million could buy you anything and everything, and a retirement nest egg of that size was the ultimate dream. Fast-forward to 2021 and a gallon of gas now costs an average of $3.42 (3) and a new home will set you back around $374,900. (4) Even though $1 million isn’t a stretch for you, you will need more resources and creative strategies to have the financial flexibility you want so you can work because you want to, not because you have to.
Debunking the Myth
There are many reasons why $1 million isn’t what it used to be, including:
The More You Earn, the More You Spend
It seems like no matter how much money you make, there are always more things to spend it on. Whether it’s home renovations, an upgraded car, golf club fees, vacations, or helping your parents financially, it can seem like your financial goals always outpace your income.
I like to refer to this as the “more” society. Income rates haven’t increased substantially (although they could be going up soon) over the years, but the desire to keep up with the Joneses and have the latest and greatest technology has. This impacts the million-dollar myth because although affluent families make more, they also spend more. The result is not necessarily a net increase in wealth, meaning your retirement savings may be decent but they are not at the level necessary to sustain your current lifestyle.
Social Security Isn’t Guaranteed
One million dollars may seem like a lot when it’s also combined with a steady stream of Social Security income, but as 2021 showed us, Social Security is not guaranteed. The Social Security program has been running a surplus since 1982; but those surpluses officially ran out this year, forcing the system to start drawing down its reserve assets. (5) Recent estimates suggest that the current program will run out of funding by 2034; (6) at that point, if no changes are made, benefit payments may shrink to 78% of what Americans expect. (7)
Based on these trends, it’s not unreasonable to plan for reduced benefits or even no benefits in the later years of retirement, which makes the million-dollar retirement that much more unsustainable.
Inflation: The Silent Retirement Killer
Put simply, inflation erodes the value of your money over time. From 1989 to 2019, the average annual inflation rate was 2.5%, (8) but in 2021 alone, we’ve seen a 6.8% increase in prices. (9) That means that something you bought in 1913 for $1 now costs $28.08! (10)
So, what does this have to do with the million-dollar myth? Well, let’s look at history. If we assume inflation will continue at the historical average of 2.5% each year, $1 million today will only be worth $372,000 in 40 years. (11) While still a decent sum of money, it’s certainly not enough to buy the comfortable 30-year retirement you dream of throughout your working years.
Rising inflation tends to happen so gradually that it’s hard to see the effects right away; but over time, it has a huge impact on the type of lifestyle you can afford.
Based on my experience, an affluent family making $250,000 a year will need roughly $5.5 million in assets to maintain their lifestyle in retirement. Therein lies the myth. The $1 million retirement of your dreams actually equals $5.5 million when spending habits, (lack of) Social Security, and inflation are considered.
What Can You Do?
So now that we’ve debunked the myth, what can you do to build wealth and maintain your lifestyle throughout retirement? Saving more, working longer, and spending less are the go-to answers to achieve any financial goal, but there are more specific actions you can take to set yourself up for a strong retirement future. Let’s take a look.
Invest in Stock
It may sound simple enough, but I’m not suggesting your run-of-the-mill 60/40 or even 70/30 asset allocation. Rather, I’m suggesting that you invest entirely in stocks. Contrary to popular belief, affluent families with sizable retirement nest eggs will not grow their investments by sitting on bonds. This piece of advice is certainly not for everyone, so it must be thoroughly reviewed in the context of your overall financial plan.
Create Tax Diversification
Let’s not forget about taxes and risk when it comes to investing. Keep more money in your pocket by considering non-qualified brokerage accounts. Though these accounts are not tax-advantaged while saving for retirement, they can provide tax benefits once you reach retirement since they do not have required minimum distributions (RMDs).
High-appreciating assets like stocks can be held for as long as you want without being forced to sell or withdraw funds to take an RMD. Not only can this help reduce your overall tax liability by creating diversification, but it also allows you to keep your funds invested for longer, enabling you to earn more through compound growth.
Consider Alternative Investments
Another way to create tax diversification in retirement is to invest in alternative assets, which also have the added benefit of acting as a hedge against volatility. These assets fall outside of traditional stocks and bonds and can help to reduce risk in your overall portfolio, since they often move in ways that are opposite to the rest of the market. Consider investing in private equity, venture capital, real estate, and commodities as a way to build wealth up to and throughout retirement.
Maximize Your 401(k)
Be sure you are maximizing your contributions to your workplace retirement plans by utilizing Roth after-tax options. In 2021, you can contribute a maximum of $19,500 ($26,000 if older than 50) pre-tax. (12) However, the maximum contribution amount jumps to $58,000 (employee and employer combined) if you make after-tax contributions. (13) This can increase your retirement savings exponentially over time.
Review Your Debt
Reevaluating your relationship with debt as you approach retirement can make the difference between a $1 million retirement and the ideal $5.5 million retirement. Many people don’t want to carry debt into retirement, as it has come to garner a negative reputation in the “more” society. But holding a certain amount of “good” debt can actually be a great way to leverage what you have. Good debt, like mortgages, can free up cash that can then be invested in growth-oriented stocks or socked away in your Roth 401(k). As you can see, all these options work together toward the ultimate retirement goal.
Don’t Get Stuck on the Million-Dollar Myth
The million-dollar myth can be comforting for many people. It helps them believe that if they just reach a certain amount, all their problems will be solved. But unfortunately, living out such a myth can ultimately create more problems than it solves. At Envision Wealth Planners, we’re ready to help you plan a path to your ideal $5.5 million retirement. If you’re ready to learn more about how we can help, schedule a no-obligation introductory phone call or reach out to me at email@example.com or 407.720.6535.
Sean Gerlin is founder, principal, and a financial planner at Envision Wealth Planners, an independent financial advisory firm founded on the core values of family, honesty, and a determination to be a master of the trade. With almost 10 years of experience, Sean specializes in serving affluent families and commercial real estate executives and brokers, providing comprehensive, customized financial guidance and services for their complex financial needs. Sean acts as a family CFO, managing and coordinating the many moving pieces of his clients’ financial lives. Sean is known for his commitment to building long-term relationships and paying personal attention to each client. He is passionate about helping his clients experience the relief that comes from having organized and well-planned strategies and portfolios, and he desires to help them by shouldering some of the financial burdens they face.
Sean has a bachelor’s degree from the University of Florida and holds the CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant®, and Chartered Life Underwriter® certifications. When he’s not working, you can find him cooking, eating good food, traveling, coaching his son’s baseball team, or playing golf. He loves spending time with his wife, Nicole, and their two kids, Avery and Will, and entertaining friends in their beautiful backyard. To learn more about Sean, connect with him on LinkedIn.