Why having a million dollars might still not make you a millionaire

I’ve long talked about the necessity of being a millionaire. We all pretty much need to be at least a millionaire, give or take, if we want to have a comfortable retirement, because it’s only in that way that we can have the income we need to support it.

(Not everyone is cut out to generate passive income or be a landlord.)

But don’t let that strike too much fear in your hearts. Achieving millionaire status is difficult, but it is doable with sustained effort over a long period of time.

If you started from zero today, you could gain a million dollars in the following ways (assuming an 8% return):

  • $300 a month for 40 years (8% return).
  • $700 a month for 30 years (8% return).

Even a 6% return can get you a million in 30 years for three digits put away each month.

Now this is assuming you’ve started from zero and with no assets. Ever had a job with a 401(k)? Then you’ve already got a head start. A little goes a long way, especially early in life.

But a million dollars isn’t always the same for people.

And it’s important to know the difference, as it can mean big differences in how your retirement funds play out.

Read on, future millionaires! This affects all of you.

Meet Alix and Blair

Alix has a million dollars. Blair also has a million dollars.

Alix has been saving for many years through workplace plans, and has all of the earnings in pre-tax 401(k) and Traditional IRA plans.

Blair saved through workplace plans as well, but was able to utilize Roth 401(k)s for the duration, and amassed a million dollars there.

Both of these people have done a pretty impressive thing, to amass a million dollars in tax-advantaged savings accounts. Not an easy task. Bravo indeed.

However, even though our duo all can say that they’ve got a million bones in the bank, the more important questions is: how much do they have out of the bank?

Talking taxes

The Roth 401(k) and Roth IRA are very simple to talk about. Assuming you’re reached the appropriate age for penalty-free withdrawal (and a few other technicalities), if you were to withdraw a million dollars, you’d have…a million dollars.

This is because money in a Roth has already had taxes taken from it. So withdrawing from a Roth product can be tax-free and penalty-free. What you have is what you have.

Which is what Alix has.

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Now, let’s talk about Blair. A 401(k) and Traditional IRA have one thing in common: they are contributed to “pre-tax”, which means that taxes have not been taken out on that money.

And they have to at some point. Which is usually the point at which you withdraw. At this point, it’s considered like income. Income that needs to be taxed.

How much will you be taxed? Well, that depends on all the same factors that go into the taxes taken out of your paycheck, which, as we know, is variable.

When Blair goes to take out money, taxes will need to be paid. And this could be 15%-30% or even more, depending on a range of factors (such as how much to take out in a given year), some of which we can’t know in advance.

If we just take the 30% figure, that means that after Blair takes out a million dollars, what will be there to be spent? $700,000.

Not a million.

What about you?

Most of use are going to be somewhere in between Alix and Blair. Some investments will be pre-tax and some won’t be.

Do you need to have a million dollars post-tax to truly be a millionaire?

The answer? Maybe, but it doesn’t matter.

The more important question is: do you have enough money to live on in retirement? Are you going to be comfortable enough, and are you going to be able to live the life you’ve been dreaming about?

When I say that we all need to be millionaires, it’s not that having $999,999 means you’re not okay. For some of us, a million dollars, even pre-tax, won’t be enough. And remember that with inflation, a million dollars today won’t be worth a million dollars in 30 years.

But you have to start a goal with something. We need to figure out what we need, and then we need to start working toward it. Just saying that we need “more” money isn’t sufficient, because “more” isn’t something you can achieve.

But that can be a difficult process, and it’s likely to change over time. So, for those of you who don’t have any clue what you need, that’s okay. Start with a target of a million dollars, and figure out what you need to do to get there. Start now, even your plan is imperfect. You can refine it later.

A million is a good place to start for planning purposes. And it is achievable. Just know the difference between Alix and Blair’s situations, as they can make a big difference in your plans.

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