Harvey Jones

Here’s what you need to save to retire with a $1 million pension

There was a time when $1 million was a lot of money. Of course in many respects it is, but when it comes to retirement, it isn’t.

According to the 4% rule, it falls well short.

This states that if you take 4% of your total retirement funds each year as income, your pension funds will never run out. It is known as the “safe withdrawal rate”. So if you have $1 million and withdraw 4% a year, you will only really have $40,000 a year to live on.

Now for some people, that may be enough. It depends on where you live, the local cost of living, what pension your partner has, whether you will have a bit of work on the side, and what you have in the way of state and workplace pensions.

The answer also depends on your tastes. If you dream of spending your retirement jetting around the world, or yachting to sun-soaked islands, then $40,000 will not even begin to cover it.

At some point the money will run out and you certainly don't want that to happen, especially in your final years.


Million dollar pension

For the sake of argument, let's say $1 million of personal retirement savings is enough, and you can make up any shortfall from other sources. If you reckon you need $2 million, or $3 million, then double or triple the figures I'm about to throw your way.

So how much did you need to put away each month to achieve that $1 million portfolio? The answer largely depends on your age.

The younger you are, the easier it is to save for retirement, as time is on your side, and time is the most valuable commodity investors have.

My figures assume you invest in a diversified portfolio primarily comprised of stocks and shares, possibly with some bond exposure, and shun cash. I'm also assuming you generate an average return of 7% year after charges over the longer run, made up of capital growth from rising share prices, and dividend income reinvested for growth.

It’s best to start young

So let's say you are 25 years old, and far-sighted enough to have woken up to the importance of investing for your future.

Congratulations, you've just made a brilliant move, one you will never regret. Now back it up with some action.

You can achieve $1 million by investing $400 a month, which will give you a grand total of $1,025,326 at age 65, assuming 7% growth.

The same applies whatever currency you are investing in, so £400 a month will give you £1,025,326, and so on.

The downside is that at age 25, $400 a month is a lot to set aside. Incomes are lower at this age, plus you have other financial demands, such as student debt or saving for a property deposit, as well as having a bit of fun.

You could start with less than that. If you save $275 a month, but increase that by 3% a year, every year, taking advantage of pay rises and so on, you should also end up with a million (see table below), assuming my 7% growth figure holds. That sounds a bit more doable.

All figures assume 7% a year growth, after charges.


A small delay can cost you dear

Time is on your side but do not waste it, because if you delay until age 35, you have to work more than twice as hard.

With only 30 years to go until you turn 65, you have to put aside $850 a month, which is quite a leap.

Alternatively, if you increase your contributions by 3% a year, you can start off with $625 a month, then increase that over time.

This is significantly more than if you had started 10 years earlier. Those early contributions are the most valuable you will make, because the growth and dividends have much longer to roll up, year after year, and benefit from the magic of compounding.

This means if you don’t start until age 45, you really have to put your back into it. Assuming you are starting from scratch (which happily, you almost certainly won’t be) you would have to invest $2,000 a month, to beat the million mark. That falls to $1,550, if you ramp up your contributions by 3% a year.

If you are beginning with zero money in your pension pot at age 55, then hold on tight, you have to invest a mind-boggling $6,000 a month to have any chance of assembling a million, or $5,250 if you increase your payments by 3% a year.


Never invest in cash for the long term

As I said, balanced portfolio of stocks and shares remains the best way to achieve these targets, given that you get barely 1% on cash at the moment.

At that dismal rate of growth, a 25-year-old will need to save $1,750 a month to make a million by age 65, while a 55-year-old would have to put aside an astonishing $7,900 a month.

Anyway, that’s enough figures. The simple message is that stocks and shares are the best way to build a big enough pot of money to retire on, and the longer you give your money to grow, the easier it will be.

If I’ve thrown too many numbers at you, here’s a simpler calculation: invest as much as you can afford, and leave it to grow for as long as you can.

Also remember is that in 10, 20, 30 or 40 years, the buying power of $1 million will be significantly less, due to inflation.

But that’s for another article.


Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.


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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.

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