Being a millionaire is a popular goal, and for many years, the term has been synonymous with being wealthy. After all, $1 million is a lot of money. If you have that much, it's assumed that you're doing very well.
That was true in the past, but not as much any more. While that much money provides financial security, it doesn't have the buying power that it used to. Some studies have even predicted that $1 million won't be enough for younger generations to retire on.
We're all aware of inflation, especially after the sky-high inflation we endured in 2022. It makes just about everything more expensive (except for Costco's hot dog and soda combo, which will seemingly be $1.50 forever). And it's gradually making the word "millionaire" mean a whole lot less.
The declining value of $1 million
The most common definition of a millionaire is someone with a net worth of at least $1 million. What not everyone realizes is just how much buying power has changed over time. To illustrate that, let's look at the amount of buying power $1 million in today's money would have had in year's past, based on the CPI Inflation Calculator from the U.S. Bureau of Labor Statistics.
If you had $1 million as of March 2023 (the most recent month with data available), that would be equal to:
- $854,672.74 in 2020
- $717,896.47 in 2010
- $559,244.09 in 2000
- $422,083.52 in 1990
- $257,755.87 in 1980
Here's another way to look at it -- if you had $1 million in 1980, that's the equivalent of having $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's certainly not common, either, as recent research shows that only about 2% of U.S. adults are millionaires. That being said, it isn't the same signifier of wealth that it used to be.
What this 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 need to account for inflation in your retirement planning. One of the common mistakes people make is that they base their financial needs in 20 or 30 years on how much their money is worth today.
Let's say that you're figuring out how much you'll need to save for retirement. A popular rule of thumb is the 4% rule, which says that you can safely withdraw up to 4% of your nest egg per year in retirement. If that money is invested well, the average annual gains should make up for your withdrawals, allowing your account to sustain 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, a savings of $1 million could potentially sustain up to $40,000 per year in withdrawals. If that's about what you spend right now, you might assume you can set $1 million as your savings target.
But if you're planning for retirement decades down the road, $40,000 per year is going to be worth a whole lot less. It could be like having $20,000 per year in today's money.
Here's what to do instead so that you can be on track with your retirement savings:
- Think about what your financial needs will be when you retire. While there's no way of predicting how much inflation will be, the Federal Reserve aims 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 as much.
- Invest in the stock market. The stock market has an average annual return of about 10% per year, so investing in stocks is one of the best ways to beat inflation.
- Use tax-advantaged retirement accounts. If you work for an employer, see if you can contribute a portion of each paycheck to a 401(k). Also, consider opening an individual retirement account (IRA) to save more on taxes.
- Save at least 10% of your income for retirement. Saving 10% of your income for retirement is a reasonable minimum. If you can afford it, aim for 15% to 20% to have more financial security.
Last but not least, remember that it's better to err on the side of caution with your retirement savings. That might mean you need to set aside more of your income for your retirement accounts for now. Having more money than you need is better than having less.
