Author Topic: Really? A 20-year-old could need to save $7 million for retirement  (Read 4000 times)

NWOutlier

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I know I know... If you read this section

" Someone retiring now in 2014 with $1 million at age 65 can safely withdraw $43,600 a year. However, [because of inflation], today’s 20-year-olds will need over $7 million to have that same lifestyle when they retire. In 1970, they would only have needed $166,000 in retirement to have a similar purchasing power for the rest of their life. "

http://finance.yahoo.com/news/a-20-year-old-will-need-to-save--7-million-for-retirement-184050231.html

They are not managing and withdrawing appropriately... BUT!!!  The rub for me is; I take the education MMM, JLCollins, etc.. and I modify it for 'my' lifestyle.  Meaning, I agree we need to save, I agree we need to control our withdrawal rate, I agree we need some money in cash to weather the low market times.... but, I tend to not be as lean or frugal as MMM...  I look to build a nest egg that can produce a spendable amount of around 54k/yr  (I'm excessive in MMM standards)...  this means I need 1.35M (I round up to 1.4M).  I also believe, why not build that nest egg to be 3x what you really need?  meaning that your nest egg could take a 66% hit and you would still be able to withdraw your living expenses without worry.....

all my wants needs and desires for money are theoretical at this point, I'm only 30% to my goal and I'm still learning....

Now, my point; in my opinion, I'm not being frugal, I'm being excessive - but it allows me the room to be frugal and save the excess as I mature into the MMM lifestyle...  but REALLY?  7M for retirement?  will inflation be that much? 

What are your thoughts on the short article? 

Best Regards,

Steve


matchewed

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Run some numbers.

How many years until you FIRE - X
How much you need when you FIRE (today dollars, 25 times current expenses)- Y

Take your Y and run it with a 3% annual inflation for X years. It is entirely possible for people to maybe need that much when you account for inflation.

Now we mitigate that with low expenses and other mitigating lifestyle choices but we are by no means immune to inflation. Inflation can be very dangerous especially for FIRE folks.

We have to keep in mind that the article is assuming a 4.5% inflation rate and that's a little big to assume for forty years but I guess anything is possible.
« Last Edit: May 02, 2014, 10:17:07 AM by matchewed »

mjs111

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I read the article and I think it's primary purpose is title shock value so you click on the link and generate some yahoo traffic.  The title/premise is refuted in the article itself when it's revealed that the $7M number is only arrived at by using a 4.5% inflation rate.

Even if one were to go with a 4.5% long term inflation rate, the flip side of that is salaries would also rise. Sure, inflation and salary rates of increase can decouple in the short and medium term, but long term they roughly sync up.


Mike

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The way I approach planning, my current (nominal) savings goal is the amount that I would need to accumulate to be able to withdraw the amount I expect to withdraw, while sticking within my max permissible withdrawal %-age. (I use 3%, rather than the more common 4%.) Every year I adjust the goal by the inflation rate. So, if prices go up, my goal goes up. Once I have retired, I am counting on my assets to grow (net of withdrawals) by the inflation rate, or at least fairly close.

hodedofome

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I think that whatever the future holds, making your nest egg as big as you can, being ABLE to live frugally, and always being able to make an income should take away whatever worries you can imagine. Apart from global thermonuclear warfare, if you have have a job that you love, that you might would do for free but actually provides you income, you should be ok. You may not live as extreme as some on this board, but if you can discipline your life to live frugally IF YOU NEED TO, then you should be able to weather even very tough market environments. Having a repeat of the '70s would be very tough if you are trying to live off stock investments in a down market with high inflation. But being able to live frugally through that, along with making a little extra income on the side, should allow you to not tap into your investments if they are down.

Personally, if I had no side income besides investments, and I was to FIRE in my 30s, I'd want at least a $2 million nest egg in today's money. This way if there was a sustained bear market I could weather it without taking too much out. But that's just me.

soccerluvof4

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^+1. I am thinking closer to 3M. But as we all know it depend too on retirement withdrawl desired made up of a whole list of things.

foobar

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How many years out and what inflation level are you looking at? 7 million 40 years out with 4.5% inflation is about 1 million in todays dollars.   Look back 45 years to 1969. The average household income was ~7k compared to the ~52k of today.  It is easy to look back and say saving a mere 100/month would have made that 1969 year old kid a millionaire. It is a lot harder to remember that was over 15% (doable but not a trivial amount of money) in the early days.

^+1. I am thinking closer to 3M. But as we all know it depend too on retirement withdrawl desired made up of a whole list of things.

kyleaaa

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They're using 4.5% for inflation, which MIGHT be a tad high, but it's not at all an unrealistic number. It could very well happen.

Of course, achieving a $7 million portfolio then probably won't be any more difficult than achieving a $1 million portfolio now, even if it happens. This is really a non-story.

tooqk4u22

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They're using 4.5% for inflation, which MIGHT be a tad high, but it's not at all an unrealistic number. It could very well happen.

We have to keep in mind that the article is assuming a 4.5% inflation rate and that's a little big to assume for forty years but I guess anything is possible.

The author notes that the average inflation since the 1960s was 4.5%, using the calculator at http://www.usinflationcalculator.com/ shows that the inflation rate to 2014 since

1960 was 3.9%  (698% Cummulative Change)
1965 was 4.2%  (650% Cumm)
1970 was 4.2%  (609% Cumm)
1980 was 3.1%  (287% Cumm)
1990 was 2.5%  (81% Cumm)
2000 was 4.3%  (81% Cumm)

Looking at above the typical assumption of 3% may not be appropriate for long term planning.

Even if one were to go with a 4.5% long term inflation rate, the flip side of that is salaries would also rise. Sure, inflation and salary rates of increase can decouple in the short and medium term, but long term they roughly sync up.

This is theoretically true but for a numer of reasons (outsourcing, productivity gains, technological advancements) this has not been the case in the last two decades.