We all understand the power of inflation, and we also understand that $100 doesn’t buy what it used to. This might come as a surprise to some, but $1 million also doesn’t go as far as it once did. Our culture in the U.S. has long placed value on becoming a millionaire and the alleged financial security that comes along with having accumulated $1 million. For example, if a retiree expects a $1m portfolio to sustain retirement and, if we use the median successful safe withdrawal rate of 6.5%, this amounts to an income during retirement of $65,000 per year (gross of taxes and fees). For some, this may be more than enough to sustain retirement. For others, especially those who have grown accustomed to living with a much higher standard of living, $65,000 will not be adequate.
In order to avoid $1 million syndrome, one should give thought to what kind of income one wants during retirement and be sure to put together a savings plan that will generate that amount of income. For many, I’m afraid the number is going to be well beyond $1m. If you’re young (or even if you’re not young!), start saving 20% of your gross income, and be sure that you continue to do this as your salary increases over time. In order to obtain financial security, it’s critical that the percentage of one’s savings keep pace with the percentage of one’s income over time.