Earth To Millennials: What It Means To Be A Millionaire At Retirement

The question for working Millennials is no longer how to become a millionaire. It’s why you’ll need at least $1 million to retire comfortably. And if you plan to retire by the age of 65, $1 million dollars might not even be enough.

To answer the question, we explore the hypothetical retirement journey of a 30-year old couple. Read on to see how long the couple (with the following profile and financial goals) needs to work. The answer may blow your mind.

Couple profile:

• Beginning portfolio: $20,000
• Annual savings rate: $5,000
• Desired retirement spend: $100,000
• Social Security: $40,000
• Portfolio real returns (pre-retirement, after inflation): 6%
• Portfolio real returns (during retirement, after inflation): 4%
• Blended tax rate: 15%

Want to track your own savings and progress to your financial goals? Try Personal Capital’s free, award-winning software.

The first question:
How long does it take our couple to accumulate $1 million?

Answer:
Given the above assumptions, it would take our 30-year old savers until they reach 68 to get to a $1 million nest egg in today’s dollars. Granted, any of these assumptions could easily change. For instance, doubling our savings rate to $10,000 a year, our couple would reach $1 million at the age of 59 years. So our first takeaway: save.

The second question:
How far does that $1 million reach?

Answer:
The $1 million is not sufficient for a $100,000-per-year spend. In fact, our 30-year-olds would run out of money by the time they reach 84 (before their life expectancies of 86 and 89, respectively, for him and her). Retiring at a “normal” age of 65, they would have been out of money by the time they were 80.

The earlier you retire, the less runway $1 million will give you. Using the retirement assumptions outlined above, we show the maximum amount the couple could spend each year during retirement if they retire with $1 million in five-year age-increments.

The third question:
How much would the couple need to retire given their goals?

Answer:
As shown in the chart below, this figure is highly dependent on age and life expectancy. The figure shows the bare minimum that you’d need for retirement with a life expectancy of 89 years given our all of our assumptions.

Simply put, retiring earlier means you need to have a bigger nest egg.

People appear to believe they can handle working later into their lives, especially as life expectancy is becoming longer for those maintaining healthy lifestyles. But to retire comfortably with only a million, you need to be 75. That’s 10 years after the normative American retirement year. To retire at 65, Millennials will need closer to $1.6 million.

The fourth question:
How can this picture change?

Answer:
First, you can move away from this notion of “depleting” your portfolio if you set a target spend level that is lower than the yield on your portfolio. Traditionally, this has been known as the 4% spending rule – a 4% withdrawal rate is typically less than the yield of a retirement portfolio. Spending less than you make is not a bad rule of thumb.

Of course, our analysis can also be changed by tweaking or adding assumptions. Unexpected expenses, such as medical care, could worsen the picture, while ownership of real estate could brighten it. A changing return environment could have a profound impact as well: if our saver couple began saving in 1975 and retired in 2012, they would have nearly double the retirement savings that they would have if their timeline was shifted 4 years earlier.

Conclusion:
So, are Millennials doomed? The bottom line is clear: to be comfortable in retirement, we may need more than we think. It’s never too early to think about retirement, and Millennials will be well-served to begin thinking about savings and investing habits that can prepare them for their long-term financial needs.

Track Your Savings Free with Personal Capital

Personal Capital Advisors is an SEC registered investment advisor. Any reference to the advisory services refers to Personal Capital Advisors. SEC Registration does not imply a certain level of skill or training. This communication and all data are for informational and educational purposes only. You should not rely on this information as the primary basis of your investment, financial, or tax planning decisions. You should consult your legal or tax professional regarding your specific situation. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data's currency, accuracy, timeliness, completeness or fitness for any particular purpose. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.