Will $4 million in retirement savings be enough?

@Money February 2, 2012: 4:36 PM ET

NEW YORK (CNNMoney) -- I hope to have $4 million saved by the time I retire in 30 years. That sounds like a lot of money, but how much would that be in today's dollars? -- Brian

It would seem as if $4 million should be enough to fund a comfy retirement 30 years from now. But you're right not to assume it will be sufficient.

One key issue is the purchasing power of future dollars versus today's dollars. Most people are not accustomed to thinking of money in real, or inflation-adjusted, terms. They use a calculator, plug in the amount they plan to invest for the next 10, 20 or 30 years, throw in a rate of return (often too high) and come away with a big six- or seven-figure projected nest egg that they think shows they'll have it made in the shade in retirement.

But psychologists and behavioral economists are familiar with our tendency to overestimate the value of future dollars. They even have a name for this phenomenon: money illusion.

Four million bucks does sound like a lot of money -- and it still will be even 30 years from now. But it won't be worth anything close to $4 million today.

Unless we go through a sustained period of deflation, inflation will erode the future purchasing power of that sum until, to quote that great economic thinker Yogi Berra, "a nickel ain't worth a dime anymore."

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Even if inflation were a relatively modest 2% a year, $4 million in 30 years would have the purchasing power of about $2.2 million today. And if inflation heats up to a 4% annual pace, $4 million in 30 years would be the equivalent to about $1.2 million today. Hardly chicken feed, but a long way from $4 million.

If you'd like to see what any sum in the future is worth today at different rates of inflation, check out this present value calculator.

Another key issue is our propensity to view the goal of retirement planning as accumulating a single large sum. The best example of this way of looking at retirement is the too-often-heard phrase, "What's Your Number?"

It's better to focus on the annual income you'll need in retirement rather than some big lump sum. Yes, both are estimates, but income is something that's more easily translated to a lifestyle. Besides, a big number can give you a false impression of how well off you are, as it may not generate nearly as much annual income throughout retirement as you think.

For example, using the 4% rule, a common metric for turning assets into income with a high probability of it lasting at least 30 years, a $4 million nest egg would generate about $160,000 in annual retirement income.

That's in 2042 dollars, however. In terms of purchasing power, $160,000 would be the equivalent of about $88,000 today, assuming 2% inflation over the next 30 years, or roughly $49,000, at 4% inflation. Still meaningful sums, but they don't conjure up that feeling of having hit the jackpot that $4 million does.

One more issue that goes to the heart of retirement planning -- how do you know whether you're saving enough to give yourself a realistic shot at a secure retirement?

Should I contribute to a traditional or Roth 401(k)?

You hope to have $4 million socked away by the time you retire in 30 years. But what does that figure represent? Is it the amount you project having based on how much you save and what you expect your investments to earn? Is it the amount you think you'll need to maintain your pre-retirement lifestyle?

It's hard to get an accurate fix on how much you'll need to save for a retirement that won't begin for several decades. There are a lot of unknowns -- how much you'll earn in the future, what sort of lifestyle you'll lead over the next 30 years, how long you'll live.

You may not be able to save as much as you envision due to layoffs or higher-than-expected living expenses. Your investments might not earn what you expect. You could be forced into retirement earlier than you wish by health problems or a "rightsizing" at work. No one can foresee how things will shake out over the next 10 years, let alone the next 30.

By going to a tool like our Retirement Planner or T. Rowe Price's Retirement Income Calculator, you can make some reasonable assumptions about how much you'll need for retirement, how much you should save and how you should invest. From that, you can get a sense of your chances of achieving a secure retirement.

Ask the Help Desk your retirement planning questions

Your assumptions aren't going to be spot on. Life and the financial markets are too unpredictable. But updating your information and assumptions in light of actual experience and re-doing this exercise every couple of years will help monitor your progress. You can make adjustments in the amount you save, how you invest or your planned retirement date. By making a number of small course corrections over the years, you'll reduce the chances of having to make dramatic changes on the eve of retirement.

Instead of wondering what $4 million will be worth in 30 years, I recommend that you focus on getting a realistic idea of how much you should be saving and how you should be investing to retire in comfort -- however many years from now that may be and however large a nest egg you'll eventually need.

MONEY magazine is researching an article on ways to reduce the financial pain of college. We're looking for families that can talk about new and creative ways that they're raising cash for college and cutting costs while they're there. Sound like you? Tell us your story and you might even get your picture in the magazine! E-mail Beth_Braverman@moneymail.comTo top of page

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