The current state of American financial thinking is terrible, if this is the best advice that “a senior editor with Money Magazine” can come up with:
Question: I’m 28 and would like to have $1 million by the time I retire at 65. What are some of the investing options I should consider? –Joshua Sin, Fresno, Calif.
Answer: I’m all for savvy investing, and I’ll get to what I think you should do on that front in a minute. But let’s not forget that when it comes to building wealth, investing alone won’t do it. –Walter Updegrave, Senior Editor, Money Magazine.
Walter Updegrave, the author, then goes on to provide a very interesting analysis of how to come up with the $1 mill by 65 – basically saying that it can’t be done:
If you begin putting away $100 a month starting now and continue doing so until 2047, the year you’ll turn 65, you would need an annual return of roughly 13.5% a year to turn that monthly hundred dollars into a million bucks.
What investment options can deliver a 13.5% annual return for almost 40 years? None that I know of.
True. Correct. Perhaps, Insightful.
But, I’ve said it before and I’ll say it again: who in their right mind cares?
Hasn’t Walt forgotten to ask the key question … why???!!!
Joshua is to be commended for thinking so far ahead, at the age of 28, towards retirement. But, shouldn’t our financial expert’s first step be to examine if the objective is reasonable?
Let’s give it a shot:
Choosing a much more reasonable go-forward inflation rate of 3.5% …
[AJC: The author assumed “a modest 2.5% inflation rate”; that’s just UNDER the current outlook for the next 5 years, pulling out of a major global recession … but, I wouldn’t bet FOR a 40 year recession, if I were planning my own retirement!]
… by the time Joshua turns 65 that $1 million will only be worth $268k.
What does that mean?
It depends on what Joshua does with the money; however, given that his 37 year financial strategy has been simply to ‘save’ (presumably via CD’s, Bonds, Mutual Funds, and the like), I guess we need to assume that he will continue that strategy in retirement.
Therefore, Joshua will have little choice but to abide by the ‘advice’ of the financial planning community, which will be centered around finding a ‘safe withdrawal rate’; a great way to find out what that might be for Joshua, is to plug his $268,000 nest-egg into the T. Rowe Price Retirement Calculator:
Now, what annual income would be reasonable for somebody like Josh to aim for in retirement? $150k a year? $75k a year?
Let’s just say that he aims for $30,000 a year or $2,500 (before tax!) per month in today’s dollars; how well does he do with his $1,000,000?
[AJC: PLUS whatever social security there may happen to be in 37 years time … how optimistic are you?!]
Do you think that Josh would have been more surprised to learn that:
a) he would need to average 13% p.a. on his savings to reach $1 mill, or
b) even if he made it all the way to his $1 mill. target, he would only have $871 per month to spend?!
Our readers represent a small but keen-to-learn cross-section of people interested in the subject of personal finance; let’s tell the financial services, advice, and publishing industries:
What sort of financial advice are you looking for?
Go ahead, leave a comment – especially if you’ve never done so before – and, we’ll challenge them to respond!