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Because I honestly don’t think that it is enough. Depending on your age it might not even be close to enough. How much income does $1 million generate each year? It depends on how you have it invested of course, but a conservative figure would be 4% or $40,000 per year.

Can you live on $40,000 per year? I know I could right now, but what about 10, 20 or 30 years from now? It’s not too likely is it?

The reason I don’t want 1 million dollars is that by the time I retire it won’t be nearly enough to cover my living expenses and unless you are already well into your 5th decade it isn’t enough for you to live on in retirement either.

It’s difficult in the extreme to project into the future because so many things can change. Who would have thought 10 years ago that interest rates on savings would be well below 1% or that you could get a fixed 30 year mortgage for under 4%. In case you’ve forgotten, the average national mortgage rate in the U.S. in February of 2002 was 7.01%

1 Million Dollars Versus Inflation

Inflation also has to be taken into account. While this has been running under 3% for much of the past decade (it was actually negative during much of 2009), we can’t assume that this will continue into the future. Inflation from 1952 to 1967 was quite similar to what we are experiencing now, but the pendulum always swings back the other direction. From 1968 to 1982 inflation ran at double that rate or 6% and hit highs of over 14% during 1980. What will be the value of your million dollars if inflation hits 14% again or runs at 6% for 15 years?

Whenever you are planning for the future it pays to plan for the worst case scenario. Of course we can’t really do this effectively because a worst case scenario might see us repeating the deflation of the Great Depression or the hyper inflation of post WW1 Germany or Argentina in 1989 and 1990. We can however plan for the worst case scenario within “normal” boundaries, excluding black swan events in our plans.

Using a 7% inflation rate it is easy to project prices doubling every 10 years using the Rule of 70. If you feel that 1 million dollars is enough to retire on in today’s dollars, what about 20 years from now at 7% inflation. Easy enough to see that in 20 years you would need 4 million dollars, but it doesn’t stop there. Many retirees will live another 20-30 years after they retire. This means to be even close to comfortable given the probability of increased inflation during the next 40-50 years you would want to accumulate something approaching 6-8 million dollars if you are planning to retire in 2032. This should cover your current needs at that time as well as providing some growth to provide for future increased needs.

Published Inflation is Wrong (sort of)

And consider this…we may already have inflation of over 6%, especially if you are one of the non-consuming consumers (as I assume many of you are).

The published inflation rate comes from the Consumer Price Index (CPI) which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Because it averages many different goods it is normal that the rate of inflation for some items (say food and gasoline) is going to be higher than the stated average and the rate of inflation for others (consumer durable goods, clothing, etc) will be lower than the stated average.

This is in fact the case right now and if you look at the most current CPI data you will see that food prices for home use are rising 5.3% and gasoline is rising at 9.7% while items such as communication (PC’s, cable, internet) are falling 0.6%, both recreation and personal care products rising just 1.4% and housing rising just 2.0%.

If you agree that food and transport are your biggest consumer expenses once you retire you can see how your million dollar nest egg could deteriorate much faster than you expect, even though inflation appears to be quite tame.

If you’ve been focusing on amassing personal wealth of 1 million I suggest you change your mindset somewhat to focus on making the first million. Once you’ve broken through that psychological barrier I think you will find it easier to focus on building a more inflation proofed nest egg that is several times larger.

What is your goal for retirement? Are you shooting for the popular 1 million dollar mark or do you have higher aspirations? Am I crazy to think 1 million dollars isn’t enough?