Everyone should be a millionaire

Like everyone else, I have to assume that I need to take care of my own retirement. I only finished school 3 years ago, so I don't have a lot of money. However, by the time I retire, I'd like to have at least a million euros in my bank account. Bing! And I think you should too.

In the best case scenario, I assume a 5% annual interest rate. Given a million euros, that would translate to 50,000 euros a year in interests, or 4,166 euros a month. Given that inflation erodes the value of money, a euro today is worth more than a euro tomorrow. If we assume inflation will be 2.5% year over year, prices will double in 30 years. So by the time I retire, that 4,166 euros is the equivalent of 2,000 euros today. In other words, a million euros doesn't look like a crazy number to aim for.

In the worst case scenario, I assume a 1% annual interest rate on one million euros. In this scenario, I can't live on the interest rates and would need to eat slowly away from my one million euro bank account. Assuming that I withdraw the same 4,166 euros a month during my retirement, I'll burn through my one million euros in less than 25 years. Some people live longer than 25 years after they retire.

As said, I don't have a lot of money, but in both scenarios, it seems like a million euros is a good number to aim for. It is also an easy number to remember. The bad news is that saving a million euros is hard. How do you plan to get there?

Comments

Philip Van Hoof (not verified):

On top of owning real estate? For most people earning a million Euros just for retirement, on top of owning real estate, is plain impossible. We have this thing called "pensioensparen" in Belgium; an advice, especially for self employed people, is to maximize on that.

Because yes, retirement will not be very fancy in 30 years. Our government is making absolutely sure it will not be.

I by the way expect more average annual inflation than just 2.5% between now and 30 years. Expect that one million Euros wont be much money in 30 years: Before all European countries' debts have all been bailed out will the Euro have devaluated so much that in 30 years 4166 Euros is worth ~ 1000 Euros of today. Probably even less.

The Euro and its backing economy is still in shock and awe of the economic and financial crisis. But in a few years inflation caused by ECB's money printing (to bail out all the countries) will inevitably start hitting really hard.

And countries that traditionally have a lot of private savings (like Belgium) will indeed loose a lot of wealth this way.

So if I can give anything as advise: don't try to safe a million Euros in cash. Invest it. For example in real estate. Something with intrinsic value.

How to get there? Be self employed and invoice as much as you can.

December 21, 2010 - 17:09
znat (not verified):

Dries,

I'm surprised you are not a millionaire already?

I am freelancing at the moment, a little older than yourself. Lately I've been pondering the same question.

I don't think I'll ever get there. Even if I save for the next 25 years, I'll need to save more than I currently earn to have million euros.

At best, I'm just subscribing to a couple of schemes to help me save money and will let me live modestly when I retire (assuming I get to 65!!)

Cheers

December 21, 2010 - 17:19
robomalo (not verified):

I think about this all the time, but in dollars. That's why my philosophy is to spend every dollar as soon as you get it... only kidding, of course. I'll make my millions in Acquia and Mollom stock when they go public.

December 21, 2010 - 17:19
deadprogrammer (not verified):

To people planning this far I usually recommend "When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany". In the twenties and thirties Germany was full of people who prudently saved for retirement, as well as a whole class of retired government and military officials, and other rentier - people who one way or another secured a stable retirement income. They earned excellent interest rates and had billions and trillions of marks throughout the slow but brutal death from starvation and exposure.

December 21, 2010 - 18:11
Peter (not verified):

1. Own a house. That takes care of rent.

2. Live modestly now, get used to it :)

3. Take care of your health. That's a huge potential cost you can partly avoid.

It's a though one, I don't know how we'll handle to be honest.

December 21, 2010 - 18:53
Matt D (not verified):

Why retire? A career change maybe. I want to build sites until I'm 125.

December 21, 2010 - 18:54
Dries:

50 years years ago, computers were just invented. 50 years from now, websites are probably a thing of the past. Career change seems like a given to me.

December 22, 2010 - 16:37
Henrique Recidive (not verified):

The Drupal Trademark is your retirement. Sell it for a few millions when you think it's time and retire! But please don't sell it to Microsoft or Oracle :P

December 22, 2010 - 04:59
Anonymous (not verified):

4,000 euros is more than most of the world makes in a year.

December 22, 2010 - 07:11
Dries:

The cost of living depends on where you live. I guess one strategy is to retire in a city/country where the cost of living is substantially lower than the one where you made your money.

December 22, 2010 - 16:34
ybabel (not verified):

If we forget the peak oil and peak everything that occurs NOW (it's official, see AIE, APSO, Pentagon, etc...) and will be far more drastic in 40 years whatever occurs in the meanwhile, and if we live in ultra-liberal country (with only capitalisation to manage retreat), and if we assume no disease (because 1 million is not enough if you are sick and not in a country with social security) then your goal is pretty fair, but not achievable by the vast majority of people because it's équivalent to save 700€ (in current €) by MONTH (assuming 2% inflation and 4% interest rate) or 500€ by month (assuming 2.5% inflation and 5% interest rate).
It assumes 2.5% grow by year, and we are far from it in western countries because of the deepening economic crisis. The only growth we have is at the price of huge debts ... it's not real grow, it's cheating beacause we have no real alternative to oil. (green business is not, and will not be our savior, anybody that studies that field knows that).

December 22, 2010 - 11:15
Dries:

The trick is to get like a 8-12% interest rate instead of a 4-5% interest rate.

If I want to be able to retire when I'm 67 years old, I need to work another 35 years. If I save 5,000 euros each year, and invest it at a 8% interest rate, then after compounding for 35 years, I'd end up with a million euros.

Getting that 8% interest rate is the most important part. If you invest 5,000 euros each year at a 3% interest rate, you end up with 325,000 euro instead. A difference of factor 3! You miss out on the snowball effect of compound interest rate.

On the flip side, if you only have 2,500 euros to invest a year (208 euros/month), but you're able to get a 11% interest rate, you still get to a million euros. The trick is in getting the highest possible interest rate. That or you have to start earlier; if you save 5,000 euros for 40 years at 8%, you end up with 1,500,000 euros -- that is 50% more for only 5 years extra.

All investments offer a balance between risk and potential return. Unfortunately, if you want to get an 8-12% interest rate, you have to take quite a bit of risk ...

December 22, 2010 - 16:46
Jacob Singh (not verified):

I would not buy a house (for financial reasons) unless you want to buy something in a market with a good rent / mortgage ratio. Buying a place in a large city is usually bad this way. In the country here in MA, you can get a 3BR for about 150k which you can rent for 900/mo, if you buy a 3BR in Belmont it would likely be around $600k and you could rent it fot 2k per month . That means a 1:2 ratio vs a 1:3 ratio. So if you live in the city, buying with a big loan will end up costing you more money than renting and chucking the rest you would have spent on your mortgage into an mutual fund.

I have all my money in Vanguard funds. Since I'm only 30 and have a cash reserve to live on for 3-4 months, the rest goes into mostly high-volatility index funds, but balanced with some total stock market funds. These are low cost funds, which have a historic return rate ~7-8%. No one beats that over 25 years unless your daddy knows a congressman.

Also, being part Indian and having something like dual citizenship, I have two numbers. The number it will take to retire in the US and the number it will take to retire in India. But who knows, in 40 years India may cost more!

On the whole though, we're all screwed due to corrupt governments and rich a88holes. Except you, you're virtually guaranteed to be rich, so I wouldn't sweat it.

December 22, 2010 - 19:01
Andy Kucharski (not verified):

Most honest financial planner advice I have ever received: don't have kids, have goldfish instead. That will make your retirement plans much easier... Ouch.

December 22, 2010 - 19:33
Dave T (not verified):

In my opinion, the single biggest factor to wealth creation is having equity in a company – there are two viable exit strategies for say Acquia: (1) conduct an initial public offering (IPO) or (2) become acquired by another organization, in both cases you’re counting on your shares to have value.

Here is the hard part, do not think about retirement – focus that energy on building a successful business that has a valuation of 1M Euros (or whatever your goal is) and the financial part will take care of itself.

By my estimation, I think you are on you are well on your way – being an entrepreneur is not easy, 95%+- of small businesses never eclipse a 1M per year in revenue. However, the rewards for the few who succeed can be a healthy retirement.

Happy Holidays,

Dave
Mediacurrent

December 22, 2010 - 19:55
itkovian (not verified):

You should account for the interest you'll get and the amount you are withdrawing. Hence, you'll need to withdraw less at first as the interest generated will be quite high still. It's only over time that you'll withdraw more and get less interest.

December 23, 2010 - 11:58
Steve Case (not verified):

I agree with Philip. If you simply save your earnings with a bank, you'll get very little return but it's a safe bet. However, if you invest correctly (even conservatively) your investments won't depreciate as much with the concept of inflation. Regardless of your savings or investment strategy, with inflation comes raises and higher pay (not really in the states right now ; ) but in theory. And with the success of Drupal, I highly doubt your income today will equal your income even two years from now.

January 3, 2011 - 02:17

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