925banner1 925 Ways to Save Excerpt: What will $1 million buy in 2042?

Excerpt from 925 Ideas to Help You Save Money, Get Out of Debt and Retire A Millionaire So You Can Leave Your Mark on the World by Devin D. Thorpe

What will $1 million buy in 2042?

If you’re young, as you begin planning for retirement, you may quickly realize that you will accumulate over $1 million by the time you retire.  That may seem like a great deal of money.  You’ll be a millionaire after all.  Before you get too excited about a lavish retirement, let’s look at what $1 million will likely buy in 2042.

Let’s assume inflation runs at 3 percent per year on average.

Car:  In 2012, a typical new car costs about $30,000.  In 2042, that will likely have risen to about $72,000.  Already, you’re probably starting to feel less rich.

 Housing:  A fairly typical American home today would cost about $200,000 in many markets.  In 2042 you can expect that home to cost just over $485,000, eating up about half of your $1 million.  That suggests that you’ll want to own your home free and clear of a mortgage in addition to having a substantial retirement savings account—otherwise your retirement savings won’t be very substantial.  A rental payment of $1,500 today will likely be about $3,600 in 2042.

 Income:  What you most want your retirement savings to provide is income.  It is virtually impossible to know exactly how much income $1 million will provide—it will change every year and unless you invest very conservatively there will be some years the money actually declines in value—before you spend any.  That said, there are three ways to think about the income you’ll earn from $1 million.

 

  1. Conservative Growth:  If you’d like to know that you could live indefinitely on your investments with the income growing with inflation, you’d want to spend less than your savings generates each year.  If you assume that you will on average earn 7 percent each year, and you’ll want to keep 3 percent of the reinvested so your income grows each year with inflation, then you only get to spend 4 percent of the balance, meaning your $1 million will provide just $40,000 of income each year.  The good news is, under this set of assumptions, it will grow until you die and you’ll leave a nice lump of money to your children.  In 2042, however, $40,000 will feel like earning less than $17,000 per year.  (Perhaps added to your social security benefits it will be enough—but not likely).
  2. All the income:  As an alternative, you might want to spend the entire $70,000 your income generates each year.  Combined with your social security maybe that would provide a comfortable income.  Over time, however, inflation will erode the value of the $70,000 (which will fluctuate each year, but will not grow).
  3. Eating the Golden Goose:  As a final alternative, you can plan to spend the earnings and some of the principal each year.  If you know how long you’ll live, this is a great plan.  (The problem is that no one knows how long she’ll live.)  If you assume you’ll live for 20 years after you retire in 2042, your $1 million will provide you with over $94,000 per year.  The value of that income will erode slowly over the twenty years—enough for you to notice.  At the end of the twenty years, you’ll be flat broke if you’re still alive.

 

It is discouraging—maybe even depressing—to think about how much money life will cost in retirement.  Social Security is almost certain to be funded at a lower level (the likely mechanisms for reducing benefits will be pushing retirement to start later in life and indexing benefits to inflation using a formula that will result in lower benefits over time than the formula in use today.)

Choose now not to be discouraged by these facts; choose to empower yourself by saving more money each month so that your retirement can be what you dream and not what you fear.  The choice is yours.

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