Have you considered what the term millionaire means over time? If not, you should because you had better be one when you retire.
What does it really mean to be a millionaire? By definition, it means your net worth exceeds $1,000,000. But the term has been around for so long meaning that it has to have lost much of its punch – right? For example, I’m sure at some point a “thousand-aire” was a big deal. Times have changed as the centuries old term becomes weaker every day due to the phenomenon of inflation. Speaking politically, however, the term millionaire is as strong as ever. My point being:
If you are in your twenties or thirties, you better plan on at least becoming a millionaire for when you retire.
Why? Inflation. Each day, our purchasing power decreases due to this phenomenon. Think back, can you remember when every value meal at McDonald’s was less than $3? Well, an easy way to explain to impact of inflation is to use the Big Mac Index. Yes this McDonald’s statistic is actually real and has been around since 1986. When you click on the United States in the chart, you will find the average price of a Big Mac in America as of July 2013 is $4.56. If I were to go back to April of 2000, I would find the price of the Big Mac to be $2.51. Therefore, since 2000 the price of the Big Mac has increased 81.67% [($4.56-2.51)/2.51=0.8167)].
Prices of “things” go up. Cost of living goes up. Therefore, we MUST save more for the future.
So what does this this mean for us over time? It means that our investments for retirement will need to outpace inflation simply to maintain the same purchasing power. It may mean that 40 years from now, a million dollars will not get you very far.
A millionaire today (using the Q3 2013 data) would have a net worth of approximately $125,768 in 1960. In other words, the buying power of $125,767 in 1960 would be equivalent to the buying power of $1,000,000 today using the Consumer Price Index (CPI). Just for hypothetical purposes, if a person actually had $1,000,000 in 1960, what would that be worth in today’s dollars? Essentially, to rephrase, when someone was called a millionaire in 1960 that meant they were worth approximately $7,951,175 in today’s terms! We use the words rich and millionaire interchangeably today like they mean the exact same thing. But that is not the case – when we called someone a millionaire in 1960, that meant they were roughly 8 times wealthier than a millionaire today!
An individual with nearly $8 million in net worth compared to an individual with $1 million – an 8-fold increase over the course of time yet by definition they have been placed in the same category today. And also notice the increase in median household income from 2000 to 2013 – it’s only 21.49% [($51,017-41,990)/41,990=0.2149]. The Big Mac has increased 82% and your income has increased 21%! Ouch is all I have to say…
So why present this information? Because as the inequality debate is becoming more prevalent and I think it important to really consider what we are telling ourselves. My generation will need a $1,000,000 if they plan on retiring with 25 years of income – at a minimum… Shouldn’t our generation be planning on being millionaires, at least?