Were you born after 1980? Congratulations, you must be a millionaire. I don’t mean you certainly are a millionaire today, I mean it is something you MUST do. Get it into your mind. Accept the fact that this is not a stretch goal to think about in the abstract. This is something that is on your to-do list regardless of if you write it down, acknowledge it, or believe me.
I’m saying this to myself as much as to anyone. Because I must be a millionaire. It’s a good reminder from time to time.
I’m not a fan of the term “millennial” to be honest, and we are right on the edge depending on how it’s defined. I’ve seen millennial generation starting years ranging from the mid-1970s (seems nonsensical to me) to the mid-1980s and Generation X ending as late as 1984. Em and I were both born in 1983, so we’re right at the transition. But this isn’t about demographic definitions. It’s about math.
The continuous increase in living expenses due to inflation necessitates being a millionaire to retire with any sort of security. I mean RETIRE. As in, no longer work. I don’t mean, having sufficient assets so that you can take a lower paying job to supplement investment income.
Quick and Dirty Math
(standard retirement age)
-Someone born in 1980 will reach 65 in 2045
-The federal poverty rate for 2017 is $12,060. Even though I try to be frugal, I’m not that frugal. I’ll assume 1.5 times the poverty rate for a total of $18,090.
-Historic long term inflation is just over 3%
-Assuming 3% inflation, the very lean living expenses from above would require $41,389 in 2045 to buy the same stuff.
-Using a 4% withdrawal rate for a ~30 year retirement (we’re all living to 95, right?) requires $1,034,715.
There it is. Over one MILLION dollars of income producing assets is required to live just above the poverty level. This is not a net worth value. It wouldn’t do any good to have a $900,000 house and $100,000 invested.
Retiring earlier results in a lower initial starting expense level indexed to inflation, but the retirement is longer, which requires a lower than 4% withdrawal rate.
This is pretty standard stuff, especially if you read any personal finance articles or books. So what is my point? It’s not the math, that’s easy. It’s the mindset. Becoming a millionaire is not some lofty goal that it would be nice to achieve, it’s something on your to-do list.
A multi-millionaire is probably more realistic for a satisfying retirement. So put it into your mind that you must be a millionaire and work towards that goal. This isn’t meant to be anxiety inducing either. If you are a millennial, you have the time to build yourself up to be a millionaire. It does require getting started though.
The Long Version
I really don’t want to set our retirement up to be sufficient for just above a poverty level income. We also don’t want to wait until we’re 65 to retire. Inflation has been low the last several years, at or below 2%, but it wouldn’t be smart to base the next 20-30 years on the last ten.
During our lifetimes, the annualized inflation rate is about 2.7%. One dollar in 1983 now requires about $2.45 to buy the same stuff.
From 1917 to 2017, the annualized inflation rate is 3%. One dollar in 1917 now requires about $19.03. We are in a very low interest rate environment right now, and it doesn’t make sense to carry that condition forward to the rest of our lives. So, I always use 3% for inflation going forward.
I think it’s really about getting rid of the idea that a millionaire is a very wealthy person, somehow out of reach in the near term. Since it’s a nice round number, it’s easy to latch onto. No one wants to brag about being an $834,000-aire or a $1,354,000-aire. Hitting that 7 digit point is fantastic, but it’s a stepping stone to where we need to be.
Game shows, TV, movies, and books have been building the 1,000,000 point into our minds for years as a vast sum of money. I think this lulls people into thinking a lesser sum will be enough. Especially younger people that have a long time horizon.
The TV show Who Wants To Be A Millionaire? started in 1999. $1,000,000 today has the buying power that $683,899 had in 1999. Who Wants To Be A Nearly Three-Quarters Millionaire? just doesn’t have the same catchy ring to it.
The Millionaire Next Door, which is a good book, was published in 1996. If we set our savings goals for that cool million in 2045, it only has the buying power that $281,513 did in 1996.
As you can see, the quick math I did earlier doesn’t give us much room for enjoying retirement. Especially since that number is for one person.
But what about social security?
Yeah, that’s a thing that might be there at some point.
In all seriousness, it will probably be there in some form. If it is, it probably won’t be 100% of what we’re supposed to get. Also, it doesn’t start until we’re 67 and we certainly aren’t planning to wait for that. I view social security as something that will be nice if we get it, but I’m not going to count on it. In my mind, it’s just another tax. Full benefits should be able to be paid through 2035, so by 2050 when we’re eligible, there will at least be a reduction. I would rather not count on it and be surprised than count on it and have to go back to work if it wasn’t what I was expecting. If we save now based on the assumption that it won’t be there, our early investing will pay off in time-value gains. We can always reevaluate as we age.
What about that spending level? In retirement it will just be Em and I. We could probably make it work, especially since we won’t have a house payment. Then again, by that point our property insurance will probably eat up a lot more money. So I guess we would also have to move. And we would have to become even more weirdly frugal. Except, we won’t move or deprive ourselves, unless we want to, because we are going to be multi-millionaires.
What about that withdrawal rate? Do we really need 25 times our living expenses? No. We probably need more, a 4% withdrawal rate might not preserve enough capital to get us all the way through retirement. But that’s OK, because we’re going to be multi-millionaires.
We’re not even close on our assets, or our net worth to the millionaire mark. We do have these four small humans to raise after all. But, we have a plan. We’re working it. And we will be multi-millionaires.
I’ll repeat the big idea: Becoming a Millionaire is not something unattainable that would be nice to do. It’s something that needs to be done. Don’t let that scare you though. You have the time to make it happen.
What do you think? If you’re not a personal finance geek, this may be a surprise to you. If you are, have you thought of the fact that “Millionaire” has been built up in all of our minds, but it’s really just a stepping stone?
*Yes Gen X’ers should be millionaires too, and whatever we’re calling the generation after millennials as well.