What happened to the millionaire next door?

The well known book by Thomas J. Stanley, The Millionaire Next Door, was written in 1996 when arguably a million dollars still felt like…well, a million dollars. At least to me.

But $1 million in 1996 is not equivalent to $1 million in 2014.

CookiesPut in terms of one of my favorite commodities, chocolate chip cookies, I could buy my favorite cookie for $1.00 in 1996, so, theoretically, I could have retired with 1 million cookies.

Today, that same cookie is $2.70, so now I can retire with only 370,370 cookies.

Does that mean I need to save three times as much to have enough cookies when I retire?

Stated another way, Boomers in 1970, starting out with bell bottoms, bad hair and dreams of retirement with a nest egg of $1 million found out in 2010 that they really need to have $5,620,000 – and their hair is bad again.

Screen Shot 2014-02-11 at 5.11.50 PM

Source: http://www.bls.gov/data/inflation_calculator.htm

Around here we think about retirement as much as the next person and certainly as much as many of our clients and the clients they serve.

We wondered how Americans would react to having $1 million of savings – the mythical quintessence of affluence. Would they expect to spend it or hang on to it?

To address our curiosity, we asked a question of a general online panel of 1019 American adults.

The question was simple: Assume that you have saved $1 million for your retirement.

Would you expect to:

a) Live off the income generated and never use principal

b) Live off the income generated and also use some of the principal

c) Spend it all?

While you cogitate on how you would answer this, let’s lay out two quick observations that many of us are familiar with:

Most Americans will need to have the discipline to save in employer sponsored savings plans, as well as have the investment savvy to maximize returns at an acceptable level of risk.

Not only do we all need to understand how to conserve our money and invest it, we also need to understand how to draw down on the principal in such a way as to strike the perfect combination of not dying before our money runs out and not leaving more money behind than they want to.

While you continue to think about this, we offer you a distracting limerick:

There once was a man on Nantucket,
Whose savings were all in one bucket.
“Diversify I must,
Or else I’ll go bust
And end up a bum in Pawtucket.”

Returning now to answers to our question:

Door #1: 26% of Americans say they would live off the income of their (fictional) million dollars and never use the principal. Note that a high CD rate today will return $10,500 per year.

Door #2: 60% say they will live off the income generated and some of the principal. If we assume 20 years in retirement and a modest return on investments, the million dollars will produce roughly $60,000 to $70,000 a year with some money left over when our happy retiree shuffles off this mortal coil. The beneficiaries could be grateful offspring or the Home for Wayward Manatees.

Door #3: 3% say they will spend it all. A 35 year old making $60,000 (this is slightly above median household income in the US), retiring at 65, living until 85, no social security (sorry) and earning 5% in the market will need to save about $1 million and will spend every penny by 85.

Door #4: 11% are uncertain.

And the answer is…Door #3?

For those of us fortunate enough to be able to earn and save money, we will need to be constantly reminded of how much our favorite cookies will cost in retirement and how few we will be able to buy.

Many of us may need to be taught that drawing down on principal should have been part of the whole plan in saving money in the first place. That’s the way the cookie crumbles.

So what do you, our gallant readers, think?

a) Should we follow up with another question that asks what Americans would do with $500,000 or $100,000 in retirement savings? Would that be more realistic?

b) Is there another question you would love an answer to? If a suggestion intrigues us, we may hop on to another omnibus. No promises, though.

c) Should we never, ever include another limerick?

Write us a note to let us know your thoughts.

VosgesAnd for the first five of you who post your comment either on our company LinkedIn page, or via our Twitter page, we’ll send you a Vosges Exotic Chocolate Bar Library!

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