Here's why a dollar is not a dollar

I’m going to throw out a number: One MILLION dollars! Seems like a lot of money. Feels like a lot of money. Money we’d all like to have sitting in the bank right now. Empowering! Might even make us feel rich! How hard would it be to save up that much? Seems daunting, even impossible, especially when we might be saving less than one or two thousand a month.

Poof – windfall from a lottery or inheritance from that great uncle you never knew. What could you do with a new found million dollars in the bank? You could take some great vacations, you could buy a new house, pay off the mortgage, upgrade the furniture, new car, boat, toys. Help your family. You could even save it for retirement…

Here is the problem. We think a million dollars is a lot of money. If we had it in the bank today, it would feel like a lot of money. And in terms of our current lifestyle and spending, it would BE a lot of money.

But, now think of this one million as your retirement fund and you are about to retire. It's no longer a "spendable" million dollars – it's an "annuity" million dollars. Therefore, it's only worth about $40,000 a year or $3,300/month (using the standard 4% rule). That’s because as a retirement asset it has to generate income for 20-30+ years. We can’t just blow it on houses, cars, boats, tech and trips. And let’s be frank: $40,000/year is only about two times the poverty level in the U.S. In this context, a million bucks is, sadly, a relatively small amount of money.

Part of the problem of building our retirement fund is $250,000, $500,000, $750,000, and even a million dollars seems like a lot of money, because we think about these sums in terms of our current mental context as spendable cash. But, from the perspective of retirement income value, it’s all small beans.

I don’t know what you will need in retirement – only you do. I don’t know how much your monthly or annual retirement lifestyle will cost. I don’t know how much Social Security will cover, or if you will also have a pension.

I do know that whatever annual income you need from your investments – you’ll likely need around 25 times that amount in your retirement fund when you are ready to stop earning a regular paycheck. So, if you figure you can live a great life on $80,000/year, Social Security will give you $30,000/year (from two earners), you plan to work a bit (earning $10,000/year), and the rest has to come from your investments, then you need to have about a million dollars in investment assets to make this happen.

Here is the good news: You don’t actually have to save a million bucks. In fact, in general, you'll likely need to save less than 20% of that. If you start saving and investing in your mid-20s and continue over your working life, investing in low cost index funds, your approximately $185,000 in lifetime contributions will likely result in about a million dollars – based on historical, inflation adjusted, stock market performance – when it comes time to retire.

Doing the math: If we invest $440/month for 35 years ($440 x 420 months = $184,800) we could have just over a million saved for retirement ($440/month @ 8%/year compound interest for 35 years = $1,009,308). So said differently, if you save and wisely invest $440/month during your working life, that effort (based on historical returns) will likely turn into a retirement income stream of about $3,300/month for the rest of your life. Not too bad!

So next time you read somewhere that the average amount saved for retirement is $125,000 or even $250,000 for those approaching retirement, don't be impressed or comforted. Do the math of dividing by 25 and see that's only an annual retirement income of $5,000 or $10,000. Don't get caught looking at retirement dollars through the lens of spendable dollars. Doing so may lead you to take your foot off the retirement savings and investment gas long before you should.

Bottom line:

  • We can’t look at retirement money the same way we look at money in our checking or savings account. It does not have the same value, because it serves a very different purpose, as an annuity.
  • You need a lot of retirement money to support a target annual retirement income – 25 times the target income.
  • While it seems impossible to build that much money, it's not with discipline, time and compounding.
  • If you start young and invest wisely, you may have to contribute no more than 20% of the money that you need to fund your retirement – compound interest and time does the rest.
  • If you didn’t start young, start now!

If you say, “I get it, but we have been trying to save consistently for years and we just can’t seem to make it happen,” we can help. Learn more at

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