Should becoming a millionaire be my retirement goal?
It is a common financial dream to become a millionaire, with the thought that if a person amasses a million dollars, all their financial concerns will be a thing of the past. However, with people living longer and increasing inflation, is a million dollars enough to retire on?
The dream of having a million dollars
Many Americans dream of having a million dollars or perceive that having a million dollars would more than prepare them for retirement. However, with increases in inflation, this figure does not offer a person as much spending power as it once did.
Before diving further into whether a million dollars is still enough to retire on, let’s review the concepts of inflation and purchasing power. Inflation is the rate at which the price of goods and services increases. As inflation increases, the value of a dollar will have less purchasing power, meaning you can purchase less with the same dollar value. The Federal Reserve, the central banking system of the United States, has a goal to keep prices from rising too quickly or slowly and has an annual inflation target of 2%. Using a simplified illustration based on this 2% target, if a person today spent $500 on groceries each month this year and inflation increased by 2%, the person would need to spend 510 dollars per month in the next year to get the same amount of groceries. Of course, in the real world, inflation rates are not this tidy. Some goods and services are increasing at rates much higher than 2%, like college tuition, and others are not quite growing at the same rate, like 23-ounce cans of Arizona Iced Tea, which has been holding steady at 99 cents for over 30 years.
As of February 2024, the current inflation rate in the United States is 3.2%, as reported by the Bureau of Labor Statistics. In 2023, the inflation rate was 3.4%, but recent crises like the COVID-19 pandemic saw the annual inflation rate in 2021 skyrocket to 7.00%. When planning for retirement, the goal is to have enough money saved or coming in through passive income to stop working, but inflation becomes a risk to ensuring that a person’s purchasing power remains intact as they age.
Should saving a million dollars be my retirement savings goal?
It depends. Looking at inflation rate data and reading news articles about how expensive things are becoming can be depressing and leave people feeling like they will never save enough to retire. A million dollars today is not what it once was. Even if inflation grew at the annual target of 2%, which it did not, a person would need to have roughly 2 million dollars today to recreate the purchasing power of 1 million dollars in 1990.
What does this mean for retirement targets? It depends. Generally, no singular retirement savings goal will be appropriate for everyone. For some, reaching a million dollars was never actually necessary to retire. For others, they will need to save significantly more than a million dollars for retirement. Retirement savings goals should consider both personal and economic factors, like expected inflation, to determine the best savings target. Personal factors will include the amount a person plans to spend in retirement, health factors that may extend or shorten their life expectancy, and other sources of income like Social Security or pension income. A person who expects to spend $100,000 a year and has no pension income will need to save significantly more to meet their retirement expenses than someone who expects to spend $40,000 a year and will receive pension income covering $30,000 of those expenses. Luckily, today, several online calculators help make the process of determining a person’s unique retirement savings target significantly easier, including both personal and economic factors.
Planning for retirement savings is not as simple as reaching one holy grail amount of wealth, and a million dollars should not be the default retirement savings goal for everyone, but it could be, as with most things in personal finance, it just depends.
