Over the weekend, the New York Times had an article about retirement and the million-dollar illusion. What, you may ask, is the million-dollar illusion? Quite simply it’s the idea that $1 million dollars will be ample for retirement. Jeff Sommer writes:
…as a retirement nest egg, $1 million is relatively big. It may seem like a lot to live on.
But in many ways, it’s not.
Inflation isn’t the only thing that’s whittled down the $1 million. The topsy-turvy world of today’s financial markets — particularly, the still-ultralow interest rates in the bond market — is upending what many people thought they understood about how to pay for life after work.
“We’re facing a crisis right now, and it’s going to get worse,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “Most people haven’t saved nearly enough, not even people who have put away $1 million.”
The article proceeds to go through the math of low interest rates and increasing longevity. This is not new, but sometimes it is difficult to get clients to focus on the big picture.
The big picture is not whether the most recent quarterly return on their balanced account was +6.3% or +6.4%, but whether that account balance was $300,000 or $3 million.
Since industry sources suggest that only 3% of retail accounts ever have balances over $2 million, it’s probably most important to focus on savings. This might be particularly important with younger clients, who, by and large, do not have defined benefit pensions to supplement Social Security. (In fact, it’s not clear how Social Security might be modified or eliminated by the time they get around to collect it.) The one thing younger clients do have on their side is time—time to contribute steadily to their 401k and to an outside investment account. With enough nagging from a qualified investment advisor and a reasonable investment plan, there is no reason that clients shouldn’t succeed.