What will $1 million be worth in 35 years?

Inflation will eat away at your money's purchasing power, so plan in terms of real returns.

Ruth Saldanha 11 September, 2018 | 5:00PM



Recently we published an article that explained how accumulating one million dollars in your RRSP was not as daunting a task as one might think. That article garnered a lot of feedback, and we followed it up with another that crunched the numbers within different scenarios to assess the feasibility of saving a million dollars. However, one aspect that may have been glossed over is whether a million-dollar nest egg is actually enough.

A million dollars is less than one might think, says Matthew Ardrey, vice president at TriDelta Financial. Thanks to inflation, your million dollars will be worth closer to $500,000 of today's dollars after 36 years, at current inflation rates.

A million dollars sounds like a lot a lot money, and for frugal people, it may be enough--especially if their savings rate was very high in the years leading up to retirement, says Christine Benz, director of personal finance at Morningstar. But for people who have higher spending wants or needs, $1 million probably isn't going to be enough, she cautions.

The effects of inflation

In 35 years, a million-dollar portfolio, will result in in an annual income of around $60,000, Ardrey said, which in purchasing power terms, will be closer to $30,000 a year. Assuming an inflation-adjusted CPP/ OAS payout of around $15,000, you will have pre-tax income of $45,000 a year, he said. Ideally, financial independence comes from being debt-free, so servicing a mortgage or other debt on $45,0000 a year may not be feasible, Ardrey cautions.

The sad fact is that our dollars grow less valuable over time, because the cost of things that we buy trend up over time, says Benz. It might feel almost imperceptible while it's happening, but keeping up with inflation is one of the main reasons we need to invest our money in something rather putting it under the mattress or steering it into something really safe, she says. In terms of practical implications for retirement planning, the threat of inflation means that we all need to take a bit of risk in our investment portfolios to ensure that our money actually grows in real (inflation-adjusted) terms, Benz said.

So how much would a twenty-something need to retire? According to a CIBC survey earlier this year, Canadians estimate they’ll need $756,000 on average, to retire comfortably. Millennials, aged between 18-34, believe they'll need $917,000.

In your mid-twenties, there is no way to predict a final, accurate number, Ardrey says. He recommends starting with a first level target, and then realign as life goes on. Starting with a million-dollar target isn’t a bad idea, as long as you re-evaluate it and build up on it, early on once every five years, and then annually, he says.

Start with small goals and work toward gradual increases--for example, start out by saving 10% a paycheck but plan to increase that amount by at least 1% or 2% per year, Benz said, adding that this strategy syncs up with many people's earnings patterns as well. Salaries start on the small side but ramp up over time, she noted.

Finally while investing can be incredibly powerful, ultimately your savings rate will be the key determinant of your success or failure, Benz said. That's a really unsexy point, to make, but it's also empowering--you're in charge of your financial future more than market vagaries.

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Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca