Who wants to be a millionaire? That would be most of us. Or how about a millionaire two times over? Double yes! Although a million dollars is still a pretty good yardstick for a healthy retirement fund, depending on your age and state, you might need to aim even higher.
Whatever number of millions you have in mind, it ain’t gonna happen overnight. Few if any of us will get a seven-figure offer to become fabulously wealthy on a gameshow. For the majority of American workers, retiring as millionaires will require decades of hard work and diligence. But don’t let that recipe for success get you down. Not only is it an extremely reliable approach, it also has almost nothing to do with your level of income. Virtually anyone can have plenty to retire on given enough time and the right plan.
Let’s start by considering the strategy before looking at how much you’ll need, as well as how age and location affect your plans.
Staying Focused for the Long Haul
Your millionaire strategy is really that simple. If you want to see that dollar-meter roll over to seven figures, you’ll need both patience and diligence. It’ll mean taking the daily, monthly and annual action steps over time that will move you from zero to a million (or more) by the end of your career. You’ll find a fuller discussion of the winning long-term retirement formula here, but in the meantime, let’s go over the basics:
You need to be completely debt-free (everything but the house) before investing.
It’s essential to have a full emergency fund, too. That means enough money in a savings account to cover all of your living expenses for three to six months. When you skip this step, it’s all but inevitable that you’ll wind up draining your nest egg to pay doctor bills. That’s a waste of both valuable time and money.
Once you’ve hit those two steps, go crazy investing 15% of your household income into retirement. This is where the time element becomes crucial. That’s because in your quest for millions, compound interest is your best friend. It unleashes the power of exponential growth. And it’s by no means limited by your salary level. The key here is beginning to invest as early as possible.
The Million-Dollar Baseline
Now that we’ve seen how to build up a retirement fund, the next question is whether a million-dollar nest egg will keep you fed (and clothed) in retirement? The short answer is probably.
The Bureau of Labor and Statistics reports people aged 55–64 spend a little more than $56,000 a year per household on healthcare, clothing, housing, food, transportation and other lifestyle expenses. (1) As this group moves toward retirement, how much will they need in retirement accounts to be able to cover those expenses without a regular paycheck?
Before you grab the calculator, settle in. We’ve already run the numbers for you, and the news is good! To cover $56,300 in annual expenses, you’d need about $4,700 each month. All things considered, that kind of monthly cash flow will require a little more than $1 million.
The truth about the million-dollar retirement fund is it would be nearly enough for the average worker to get by on if they were considering retiring today. Your age is another factor.
How Long Until You Retire?
It’s not a question of if, but when you’ll stop working. The real questions are how much money will you need to live well in retirement, and how long do you have to get there? Whether retirement is several years or even decades away has a big influence on what your strategy will look like.
If you’re in your 20s or 30s and have decades to work and grow your investments, rejoice!
But here’s something for younger workers to ponder—the role of inflation. For example, let’s say you’re 40 and want to stop working 25 years from now. To cover the same $56,300 in expenses discussed above, you’ll need to have saved more than $2.2 million to keep pace with inflation. Or say you’re getting closer to retirement but you’ve gotten a late start on saving. Either way, the key is take steps today to take as much advantage as possible of your current income enhanced by compound interest.
How Far a Million Goes by State
To complete the picture of what a million will do for you in retirement, it’s worth asking where you plan to settle in retirement. Thankfully, the good folks at GoBankingRates conducted a study of just that question, based on each state’s cost of living index. (2) Here are a few facts that stand out:
The expected length of time a million would last varies all the way from 12 to 26 years.
Because of a combination of low property taxes and zero sales tax, you can survive on a million dollars in Delaware for 26 years!
Hawaii might be your dream destination, but with its high cost of living, the Aloha State will deplete your million in just 12 years.
Thirty-seven states have costs of living kind enough to allow retirees to survive with million-dollar nest eggs for 20 years or more.
As you can see, age and geography do shape your retirement prospects a bit. But in the final analysis, your own intensity and focus are the real keys to making a millionaire retirement a reality.