Breaking that $1 million mark in liquid assets still holds appeal as a good round number target. Most might even say that $1 million is plenty comfortable to live on for the rest of your life. Most, however, have probably never run the numbers. That sneaky little thing called inflation can really do a number on a million dollar nest egg, as Matt Sirinides pointed out in a recent article I’ve excerpted below. The 30 and under crowd should pay particular attention to the last paragraph, which highlights the realities of how far $1 million will stretch by the time they reach retirement age.
By Matt Sirinides (originally posted May 14, 2014)
Source: U.S. Bureau of Labor Statistics CPI Inflation Calculator
$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 If the place of the $1 million dollar payday in today's lexicon is outdated — and it is — by then, it will be positively extinct.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 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 out-of-pocket health care costs 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.
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.