$1M is not what it used to be

By Matt Sirinides, Investment News

$1 million hasn't been what it used to be for more than 20 years.

One million dollars in 1960 — around the time when having $1 million took hold in the popular imagination as a symbol of ultimate wealth — had the buying power of approximately $8 million dollars today.

Inflation has averaged 2.78% for the past 30 years. If we exclude the 10-year period from 1974 through 1984, when inflation averaged nearly 8%, the rate has been remarkably consistent since 1914, holding at around 2.75%. If we use that inflation rate as a rough guide, the equivalent of $1 million in 2014 will be $5 million in 2074 (in 60 years). If the place of the $1 million dollar payday in today's lexicon is outdated — and it is — by then, it will be positively extinct.

Today's retirees are doubtless already aware of how far (or short, as the case may be) $1 million dollars will stretch. Average life expectancy at age 65 in the U.S., according to the Centers for Disease Control and Prevention, is 85. Without making any daring assumptions about their portfolio, a couple with a $1 million nest egg can expect to draw $40,000 to $45,000 a year for the duration of a 20-year retirement.

Housing costs also add up quickly and account for more than one-third of a retirees' expenses, according to a Census Bureau consumer expenditure survey. But the largest concern is covering health care and medical expenses. A couple who expects to pay 90% of their own health care costs out of pocket for the span of a 20-year retirement would need $261,000 for that run, according to the Employee Benefit Research Institute, which adds up to more than 25% of a $1 million nest egg.

According to a recent survey of investors by the Insured Retirement Institute, 33% of respondents said they expected to work beyond 65, and only 16% had at least $1 million saved. The U.S. has a record 9.63 million households with a net worth of $1 million or more, according to a recent report by the Spectrem Group. Even those millionaires would still be more than $7 million shy of joining the now-infamous “one percent” — which requires a net worth of more than $8.5 million.

If all of this hasn't sufficiently diminished what it means to be a millionaire, consider that by the time the average Generation X couple retires (2035), $1 million may not be enough to cover housing costs. By the time a Millennial couple retires (2055), $1 million will barely cover the cost of out-of-pocket health care expenses.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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