The Motley Fool

You Need A Million Dollars

We hope we don’t ruin your day with this news flash, but you know that comfy retirement you’re dreaming of? The one where you wake up without an alarm clock every day, and tend to your veggie patch, and take up kayaking?

The one where you and your partner finally travel to Greece, Norway and China and all the places you’ve longed to visit? Well, it might not happen. Sorry.

Here’s the problem

You might not have enough money. That’s because many of us are saving and investing and just hoping for the best in our golden years, without taking the time to determine how much we really need to accumulate. Many of us might end up with gruesome retirements.

To make your nest egg last, you should plan conservatively and withdraw about 4% of your savings per year in retirement (adjusting the amount for inflation).

Let’s say you have an impressive $400,000 tucked away by retirement. Take 4% of that and you’ll have $16,000, or $1,333 per month. Not so much, is it? It might be enough to scrape by on, but not enough to reach many of your dreams.

You’ll need more

So odds are, you’ll want to retire with a nest egg that’s considerably larger than $400,000, if you can. For many people, a million dollars (or more) is a reasonable target.

With that, your 4% will come to $40,000 in the first year, or $3,333 per month. It still might not sound too much, especially when you compare it to the average annual wage of around $68,000, but it’s a darn sight better than $16,000.

It’s also important to remember that in retirement, you’ll often be able to live on less than you do now because:

* You won’t have commuting costs, or workplace-wardrobe costs, or $10-lunch-from-the-deli-near-the-office costs.

* If your income is lower, your taxes and tax rate will be lower.

* Your home might be paid off by then.

* You probably won’t be supporting dependents in retirement.

* You probably won’t be tucking away money for retirement, in retirement.

* You may enjoy senior discounts on health, travel and other expenses.

But you may also need more money to live off of, because:

* Health-care costs have been skyrocketing and they may not be under control or reasonable when you retire.

* You may want to buy a more expensive home.

* Inflation may erode much of your purchasing power.

* You may want to enjoy some costly activities, such as golf, flying lessons, or travel.

You can have more

Fortunately, it’s not too late to salvage your retirement.

For one thing, you can start saving and investing more. If you’ve been putting aside $5,000 for retirement every year, try saving $8,000 or even $10,000 instead. You might double your results that way. You might also consider postponing your retirement date by a few years, too, because just two or three more years can add hundreds of thousands of dollars to your nest egg.

You can also improve your lot by allocating your dollars more effectively. If you’ve been a conservative investor, sticking mainly with savings accounts, term deposits and mattresses, consider moving a bigger chunk of your assets into shares. You don’t have to throw caution to the wind and speculate — you can instead opt for solid earners and growers, including some dividend payers.

Now here’s some great news: A $15,000 investment in a term deposit that pays you, on average, 5% over 20 years will turn into $40,000. But invested in shares that average 10% annual returns — about the market’s historical rate — it will become $100,000 over 20 years! Make that a $150,000 investment, and you’re looking at possibly ending up with $1 million.

What to do

Reaching a million dollars, or coming closer than you ever planned, is not out of the question. So spring into action and your retirement might end up vastly improved.

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