Being a millionaire is a popular goal and the term has been synonymous with being rich for years. After all, one million dollars is a lot of money. If you have that much, it is assumed that you are doing very well.
That used to be true, but not so much anymore. Although so much money provides financial security, it no longer has the purchasing power it once had. Some studies have even predicted it$1 million won't be enoughso that younger generations can retire.
We are all aware of inflation, especially after the skyrocketing inflation we endured in 2022. It makes almost everything more expensive (exceptCostco's hot dog-soda combo, which will apparently be $1.50 forever). And gradually the word "millionaire" means much less.
The declining value of 1 million
The most common definition of a millionaire is a person with anet valueof at least 1 million dollars. What not everyone realizes is how much purchasing power has changed over time. To illustrate, let's look at the amount of purchasing power that $1 million in today's currency would have had over the past year, based onCPI-inflatiesberegnerfrom the US Bureau of Labor Statistics.
If you had $1 million in March 2023 (the most recent month with available data), that would be equal to:
- $ 854.672,74i 2020
- $ 717.896,47i 2010
- $ 559.244,09i 2000
- $ 422.083,52i 1990
- $ 257.755,87i 1980
Here's another way to look at it: If you had $1 million in 1980, that's the equivalent of $3.88 million in 2023.
To clarify, having $1 million is still a big deal. It's a great goal if you're not there yet, and an achievement to be proud of if you are. It is also certainly not common, because recent research shows that only approx2% of American adults are millionaires. That said, it's not the same sign of wealth as it used to be.
What it means for your financial planning
The Value of $1 Million Over the Years is more than just a fun fact to share with your friends. It's a perfect example of why you should take inflation into account in your retirement planning. One of the most common mistakes people make is basing their own mistakesfinancial needsin 20 or 30 years, how much their money is worth today.
Let's say you're figuring out how much to save for retirement. A popular rule of thumb is the 4% rule, which states that you can safely withdraw up to 4% of your savings per year in retirement. If this money is invested properly, the average annual gain should offset your withdrawals, allowing your account to support itself. There is some debate about whether this rule is correct, but it's an easy way to get an idea of how much retirement savings you need.
Based on that rule, saving $1 million could potentially yield up to $40,000 per year in payouts. If that's about what you're spending now, you can assume you can set $1 million as a savings goal.
But if you retire decades later, $40,000 a year will be worth a lot less. It could be like having $20,000 a year in today's money.
Here's what you can do instead to help you stay on track with your retirement savings:
- Consider what your financial needs will be when you retire.Although there is no way to predict how much inflation willFederal Reserveaim for a rate of 2% per year. At that rate, prices will double every 35 years. So if you plan to retire in 35 years, it's reasonable to assume your money will be worth half that.
- Invest in the stock market.The stock market has oneaverage annual return10% per year, so investing in stocks is one of the best ways to beat inflation.
- Use tax-advantaged retirement accounts.If you work for one employer, see if you can contribute a portion of each paycheck to one employer401(k). Also consider opening oneindividual retirement account (IRA)to save even more taxes.
- Save at least 10% of your income for your pension. Save 10% of your incomefor pension is a reasonable minimum. If you can afford it, aim for 15% to 20% for greater financial security.
Remember, it's better to be careful with your retirement savings. This may mean that you have to set aside a larger portion of your income for your retirement account for the time being. Having more money than you need is better than having less money.
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