It's a literal million-dollar question: If you had $1 million in 1975, how much would it be worth today, assuming you
stashed the money in your mattress?
Would you guess $4.4 million? That quadruple jump comes courtesy of the
U.S. Bureau of Labor Statistics, and it's certainly more than if you
invested in, say, a foundering mattress company.
But the buying power of that $1 million would stay
flat over 40 years. Meanwhile, a cool million just isn't what it used to
be. If you reach that magic number in 2015, it's only worth $227,000 in
1975 dollars, BLS statistics show. And the value of $1 million today
will surely decline in the years ahead, especially if inflation
skyrockets or health care costs outpace the cost of living.
"Besides
inflation, retirees are living longer, more active lives, which is
causing more nest eggs to be depleted faster than expected," says
Anthony Criscuolo, client service manager and portfolio manager with
Palisades Hudson Financial Group in Fort Lauderdale, Florida. "Too many
people make their financial planning and retirement savings goals based
on random guesses, such as, '$1 million sounds good.'"
That said, $1 million remains a
magic number
for many nest egg builders. The word "millionaire" has a delightful
zing to it. And assuming a 5 percent annual return on investment, you
can reap $50,000 a year in retirement income just by sitting back, which
beats the mattress strategy any day. Then again, you'll want to
consider the tax ramifications first.
The next million-dollar
question is: How do you get there? Consider these 10 sound principles as
you invest your way to the seven-figure mark.
Include taxes in your tally.
Withdrawing money from retirement accounts is, of course, not a free
ride, so $1 million gross is not $1 million net. "If the $1 million were
in a traditional 401(k) or IRA, all withdrawals would be taxable," says
Christine Pavel, vice president of wealth management at GCG Financial
in Deerfield, Illinois. "You also have to consider how much the investor
will withdrawal from the portfolio, and for how long." Assuming 3
percent inflation, looking forward 30 years and accounting for
retirement account taxes, "An investor would be lucky to be able to
withdraw $20,000 or less from the account for 30 years," she says.
Compounding counts. If
you're in your 20s and start investing now,
you're in luck, says Joe Jennings, wealth director for PNC Wealth
Management in Baltimore. "Due to the power of compounding, the first
dollar saved is the most important, as it has the most growth potential
over time," he says. As an example, Jennings compares $10,000 saved at
age 25 versus age 60. "The 25-year-old has 40 years of growth potential
at the average retirement age of 65, whereas $10,000 saved at age 60
only has five years of growth potential," he says.
Consider annuities as a building block.
Annuities, which people purchase to get an expected payout once they
reach maturity -- usually at or after retirement age -- also have a
rough reputation, particularly indexed annuities. But last year's
Qualified Longevity Annuity Contract regulation by the IRS set
guidelines for investors to create their own pensions. "You can invest
and put money in a retirement account, and with annuity guarantees that
you will never outlive your money," says Stan "The Annuity Man"
Haithcock, an annuities expert and author of the book, "The Annuity
Stanifesto," based in Ponte Vedra Beach, Florida.
Safety first. It may seem sexier to get in on the
latest initial public offering
or that new stock your Uncle Mortimer promises will take off. But
that's no way to build a nest egg through the years, says Jim
Merklinghaus, founder and president of JBM Financial in Rutherford, New
Jersey. "My philosophy has been a conservative approach to retirement,
investing consistently over a 30-year period of time. If your principal
is 100 percent safe, you have already accounted for 12 years of a normal
30-year retirement. The plan that avoids the loss of principal far
exceeds the joy of temporary returns," he says.
Diversify between companies large and small.
Risk tolerance and portfolio mix are major factors in getting to $1
million, and they'll differ depending on the investor. But if there's
one universal that applies, "The portfolio should be diversified among
large- and small-company stocks, domestically as well as in established
foreign countries and emerging markets," says Kenneth Moraif, senior
advisor at Money Matters in Plano, Texas. "The appropriate allocation in
each of these asset classes will be determined by the investor's time
horizon, their current assets, age and tax bracket."
Use that 401(k) all the way. Since retirement is the major savings goal with most nest eggs, make sure you
maximize your retirement savings,
says Andy Saeger, vice president and senior financial consultant at
Charles Schwab in Naperville, Illinois. "Max out your 401(k) or other
employer retirement plan, especially if you receive matching
contributions. If you're age 50 or older, make catch-up contributions.
If you can afford to save more, you may be eligible to open and
contribute to an IRA, where your money can grow tax-deferred or tax-free
until retirement," Saeger says.
Thou shalt pay thyself first.
What used to be simple, sound advice is more of a commandment when $1
million or more is the goal. "If you make the financial plan first and
then build your life around it, the outcomes are typically very
positive," says Mike Chadwick, CEO of Chadwick Financial Advisors in
Unionville, Connecticut. "Most people do the opposite: They set up their
life and then try to save after the fact, when it's painful to do so.
When something is paid off, save the extra money and you won't feel the
pain. And when you get raises, save the money until you're on target."
Avoid the temptation to spend first.
Most investors, especially in their younger years, think they can
easily make up for copious spending and shopping. "This is certainly
possible, but will require a potentially difficult, if not impossible,
return on the investment or a significant increase in savings," says
Bellaria Jimenez, managing partner with MetLife Premier Client Group,
based in Cranford, New Jersey. "Investors must ignore temptations to
spend and instead save."
Patience, patience, patience. Just as it takes
years to get to retirement age,
you'll want to stick it out, as some investments hit expected bumps.
"Over a typical working career, an investor can expect to experience at
least eight to 12 poor market years," says Jakob Loescher, a financial
advisor with Savant Capital Management and based in Rockford, Illinois.
"During these years, it's important that the individual remain patient
and not make any large market-timing mistakes."
And finally, answer the $2.3 million question.
That's how much money you'd need in 2045 to have the same purchasing
power as $1 million today, assuming a 3 percent annual inflation figure.
So how do you get to $2.3 million? "Assuming a starting account value
of $50,000 and an 8 percent return on assets, an investor would need to
deposit $13,500 at the beginning of each year over the next 30 years to
achieve that result," says Andrew Gluck, managing director of wealth
management at GCG Financial.
Culled from US news
