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401(k) Millionaires, Yes.
But How Many Times Over?

This week, Forbes encouraged us all to become "401(k) Millionaires" and laid out four essential steps to help get us there. Click to read the article.

While we enthusiastically applaud the idea of defining a retirement goal, the problem with an arbitrary, account balance-only driven goal as proposed in the Forbes article is that it does not factor in the kind of retirement you want to have or how many years the income from your investments may need to last.

We think you should consider many questions that the Forbes article omits: What quality of life do you want to have in retirement? How long do you expect your retirement to last? How much can you afford to save from each paycheck? What does your investment return need to be to obtain your retirement goal?

To find the answers to these questions, we ran the Forbes' numbers through the Compass Investors Retirement Goal Calculator.

We know that the employees studied by Forbes earned on average $95,000. With that income, assuming one starts early enough, you can indeed achieve a 401(k) plan balance of $1M by age 65 with the investment return and above average contribution assumptions given in the article. But how long will that money last? Considering a modest 3% inflation level, this "401(k) Millionaire" can only enjoy her same pre-retirement lifestyle until age 76. Thus, for these investors, the $1 million nest egg may not be nearly enough given the longer life spans that are common today.

For the Forbes retiree to safely make it to age 90 — a realistic possibility — she will have to learn to live on only 54% of her final salary during the 25 years she is retired. This standard of living reduction is likely to be too low for most retirees.

Thus, for a great many people, following the four essential steps described and reaching the magic $1M level will lead to a very disappointing retirement.

Luckily, there is a fifth step not mentioned in the article that, if attended to now, can help get you to the right place: Improve your investment return.

Given the same assumptions, but with an increase in investment return to 7.1%, that same employee can live to age 90 without any reduction in her standard of living.

So, how are YOU doing? We invite you to try the Compass Investors Retirement Goal Calculator to find out. Explore the relationship between savings, inflation and investment return. Find out how these factors will impact your financial goals and the retirement you want.

Kevin L. Coppola, President, Compass Investors, LLC