“ABOUT THAT ONE MILLION DOLLARS...”

Dr. Andrew Lee is professor of English at Lee University. He also serves as a coordinator for Dave Ramsey’s Financial Peace University. He and his wife Esmerelda have three children.

In Frank Capra’s classic Christmas film, It’s a Wonderful Life, young George Bailey walks up to the soda counter in the drug store, pulls the handle on the whatchamacallit, and exclaims, “I wish I had a million dollars!” When the lighter ignites, he shouts, “Hot dog!” In 1946, one million dollars seemed like an enormous sum. But one million of those 1946 dollars would be worth about $66,000 today, all because of that dreaded word that’s all over the financial news this year: inflation. Inflation isn’t just what Uncle Bob’s waistline experiences after Thanksgiving dinner. Rising costs mean that our money buys less with each passing year, especially when the reported inflation rate has reached 9.1 % as of summer 2022.

Yet, the idea of accumulating a retirement nest egg of one million dollars continues to tantalize us as being the “magic number,” while also discouraging many who view that magic number as out of reach and unrealistic. What would a one-million-dollar nest egg look like today, in terms of sustaining someone’s retirement? Let’s start with the “4% Rule.” This is a phrase coined by Bill Bengen around 1994; Bengen used decades of historical data to conclude that investors could withdraw 4% of their nest egg every year during retirement and never run out of money, assuming that the nest egg is invested in fifty percent stocks and fifty percent bonds. Taking into account historical periods such as bear markets, recessions, and pandemics, the 4% withdrawal rate should ensure that you don’t outlive your money in retirement. Granted, there are those who feel differently, arguing for a 3% withdrawal rate (let’s call them “Negative Nancy”) or a 5%-6% withdrawal rate (“Optimistic Oscar”), but for illustration purposes, let’s use the wellknown 4% Rule.

Withdrawing 4% of your one million dollars means you’re living on $40,000 per year, or $3,333 per month. But don’t forget about taxes: if your retirement account was tax-deferred like a 401(k) account, you’ll be taxed on each withdrawal during retirement. So that $3,333 income per month is really looking more like $3,000 (or less) per month. Suddenly that one-million-dollar nest egg is providing less income per month than you were likely bringing home while working (shucks)! The good news, however, is that you should be getting something from Social Security, perhaps between $1,000-$2500 per month, and your monthly expenses might well be lower during retirement, if for instance, you have paid off your home mortgage by the time you retire. The 4% Rule adjusts for inflation each year, so if inflation is 3% during your second year of retirement, you’d withdraw $41,200 that following year, and so on. Hitting that milestone of $1 million isn’t impossible: by investing only $200 per month in the stock markets from age 25-65, you’d have $1 million at retirement (at a historical 10% rate of return each year).

So, George Bailey’s one million dollar wish in 1946 would be worth only $66,000 in today’s buying power. But conversely, you’d need $15 million in 2022 to have the equivalent buying power of $1 million in 1946. What would the 4% Rule look like on a nest egg of fifteen million dollars? You’d be withdrawing $600,000 per year, or $50,000 per month (and that’s not including any Social Security check). But don’t forget about paying income taxes at the current top rate of 37% (ouch). After taxes of $18,500 per month, you’d be forced to scrape by on a paltry $31,500 per month. Still, that’s a lot of Grey Poupon mustard. So make a plan now. “He who is noble plans noble things, and on noble things he stands” (Isaiah 32:8).10 // September 2022