Beer money, champagne taste is a criticism that can be levelled at a fair few acquaintances of mine – not least a good friend who lives in fine style for the present but reacts like Dracula to sunlight to the word “Pension”.
Recent jousting over our contrasting lifestyles (“You can’t take it with you!” comes the counter jibe) reminded me of research from the Pru that reckons the average Brit will earn a million pounds by age 56.1
That’s a great headline, but a million ain’t what it used to be. According to the research, it would take a man (I’m one of those) 32 years to notch up his million (assuming he earned the average wage for his age, starting at 18).
Maybe I’ll put that Ferrari catalogue back on the shelf for now.
What does a million pounds buy these days?
The real question is what could I do with a million pounds if I had it now? There are plenty of answers to that, but essentially I’d like to live it up, draw an income, and never work again please.
The standard rule of thumb for living off your assets is that you can withdraw 4% a year without going bust.
My million pounds equates to a £40,000 annual income in that instance (1,000,000 x 0.04% = 40,000).
However retirement researcher Wade Pfau has smashed lumps out of the 4% rule with his data sledgehammer, so let’s use a more cautious 3% to keep us out of harm’s way.
The million pounds now delivers an income of £30,000 a year.
So if you can’t live on less than £30,000 a year then you’re gonna need to be a millionaire by the time you retire3. A real millionaire.
How to save a million
Well I say that, but although the average Brit may see a million pounds slip through their fingers by age 56, in reality it’s going to be an absolute b’stard for most to become a millionaire.
The key factors are:
The problem is that inflation of 2.5% a year will wear down that million to £626,000 in today’s money. You’d draw an income of less than £19,000 per year from that, given a 3% withdrawal rate.
So just how much do we need to put away to earn a real million, given annual growth conditions of 5.5% nominal return and 2.5% inflation?
20 years to save a million
To earn a million pounds (in today’s money) we need to invest nearly £37,000 a year for 20 years. And that 37 grand would need to be up-sized by the rate of inflation every year.
By that point, we’ve amassed around £1,650,000 in nominal terms. That’s just over £1 million in real terms.
Impossible you say? It is for me. So let’s take a more leisurely 30-year route to Millionaire City.
30 years to save a million
Annual investments of just over £13,000 a year would balloon into a million after 30 years, given the same growth and inflation assumptions as above.
But, tragically, a cool million in our hypothetical 2043 will only be worth a very uncool £477,000.
We’d need to invest nearly £21,000 a year5 to make a real million.
So let’s think more optimistically. 30 years is a long time. What if growth was a more normal 7% for a 60:40 portfolio of equities and bonds over that time?
You’d still need to find almost £18,000 a year.6
My Ferrari catalogue is now burning on the fire because I can’t afford the central heating.
Millionaire status will stay beyond the reach of the average Brit for a long time to come, barring a dose of Weimar inflation.
Even comfortable retirement status looks like a steep climb. You’re going to need a pot well into six figures as a minimum. Hitting seven figures, unless you’re rolling in it already, is going to be tough, but it can be done. You’ve got to save hard, live on less, and work long.
Who wants to be a millionaire?
Take it steady,
- Notwithstanding a raft of exciting caveats like losing an arm and a leg to taxes.
- Assuming a steady rate of 2.5% p.a.
- Not accounting for taxes or the state pension.
- Nominal return subtracting investment costs of 0.5%.
- Figure must also be adjusted upwards for inflation every year.
- Adjusted up for inflation at 3% per year.