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You're 30 and need $1M
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October 18, 2000: 10:14 a.m. ET
It's never to early to save for retirement - especially if you need $1 million
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NEW YORK (CNNfn) - You're 30 and you think you'll need $1 million for retirement. You've been dutifully saving about 11 percent of your salary, but you wonder if you're on the right track.
Doug Flynn, a certified financial planner in New York, recommends you keep all of your investments in equities - and that you may need more than you think because of inflation.
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Douglas Flynn, a certified financial planner, answers questions on Your Money's viewer mail segment.
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"Rather than just trying to accumulate $1 million, you should figure out how much you need to live on in today's dollars," Flynn said. "Then adjust for inflation and taxes throughout your lifetime. As a result, you can then "back into" the "magic number" you actually will need."
Flynn recently answered questions on CNNfn's Your Money and answered the following question for CNNfn.com.
Maria writes: I am 30 years old and just started putting away towards my retirement a year ago. My ultimate goal is to retire with a million dollars. I work as a teacher and belong to a 403(b) annuity pension plan. I put away about 11 percent of my salary, which is $32,016. I contribute about $234 a month to it. It has an annual return of 16 percent. I also have a Roth IRA mutual fund, which I contribute $100 a month. Right now it has an annual return of 23 percent. I want to know if I'm on the right track to meeting my goal. Please help with some advice, desperately needing some.
Congratulations on setting such a clearly defined goal. Investing a total of $334 per month toward your retirement represents 12.5 percent of your gross salary on an annual basis. This is a very respectable percentage and you should be commended for saving so well.
Forgetting the returns you have indicated, since past performance is no guarantee of future results, you should look at the long-term historical 75-year rate of return on the stock market as a hypothetical guide instead. This, according to Morningstar, was 11.2 percent per year from 1925 to 1999 based on the S&P 500 index.
If we assume that rate, and continuing to invest 100 percent in equities as you are currently doing, it would take you approximately 31 years to reach your $1 million goal. At age 30, this is clearly in the range for you.
Let's take a look at $1 million 30 years from now for a moment. At a hypothetical 6 percent annual distribution rate during retirement, $1 million provides $60,000 per year in earnings. This $60,000 sounds very nice compared to your current level of income, however this does not count the effect of inflation during this time.
At just 4 percent inflation, over 30 years, $60,000 in 2031 will only buy you approximately $18,000 worth of year 2000 goods and services. This may not be enough for you, considering your current income and the fact that your purchasing power will continue to erode throughout your retirement years as well.
Of course, this also does not include any additional assets, pensions, and Social Security income you may receive at that time.
Do you have a question about whether you can afford to stop working? E-mail our experts at retirement@cnnfn.com.
Rather than just trying to accumulate $1 million, you should figure out how much you need to live on in today's dollars. Then adjust for inflation and taxes throughout your lifetime. As a result, you can then "back into" the "magic number" you actually will need to accumulate to see if you are saving enough.
If you find you do need or want to save more for retirement the first thing you should consider is to raise your Roth IRA contribution to the maximum of $166.66 per month to fully accumulate $2,000 per year. This will allow you to enjoy the biggest benefit from that investment program. After that, you can then re-examine your goal to see if you are on target.
Carol writes: My husband is already retired at 63 and draws a teacher's pension of $3500 a month. I just turned 60 and would like to retire at the end of this year. I work for a major company that has recently been on hard times. We have a home valued at $150,000 that's paid for in another state where we plan to move. We're currently renting where we live now. We have approximately $120,000 in a 401(k) and another $120,000 invested. Our children are educated and gone. We are debt free except for a $5,000 loan I am paying off for one of the children. I plan to start drawing my Social Security at age 62. Will we be okay if I retire now?
The short answer is I have no idea. The reason why is that in financial planning for retirement, the first thing you need to do is have a clear indication of what your current expenses are. You then need to have an idea of what your expenses may be during retirement-- adjusting for any health care costs and lifestyle changes you will have. Once that is established you can then determine, with inflation and taxes throughout your lifetime, if you will have enough.
What I can tell you based on the information you have provided, is that $240,000 of invested assets at a hypothetical 6 percent annual distribution rate provides $14,400 per year (or approximately $1,200 per month) in income. This income, with your husband's pension and Social Security, and your Social Security combine to determine your gross income. Typically pensions do not have a Cost of Living Adjustment (COLA) attached to them and therefore do not rise with inflation, although Social Security currently does. At this point the first question then becomes... Does your after-tax income cover your expenses?
You must be very careful even if you are "okay" if you "retire now" based on your income versus your expenses. This is because you will also have to be sure you have enough for the future as well. Should you be fortunate enough to live a very long time in retirement, you will see your purchasing power erode yearly. If you don't think this will happen, just think back twenty years to what things cost. It is very likely the same thing will happen twenty years from now. Be sure to plan accordingly.
Anyway, congratulations on identifying the first step in Retirement Planning. You will need to gather much more information to project your future appropriately and answer your question definitively, though. Good Luck!
* Disclaimer 
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