The cliché is true – times have changed. What used to be financial badges of honor are no longer all that impressive, thanks to inflation. If you’re older than the average Millennial you probably remember when being a millionaire meant that you were the elite of the elite: You had arrived. You were invited to the exclusive events, lived in a giant house (if that was your thing) and a quick trip to Europe was no big deal. What happened?
What Is Inflation?
To understand why $1 million isn’t overly impressive anymore, you have to understand inflation. The university answer is this: “Inflation is a sustained increase in the general level of prices for goods and services.”
But here’s the real explanation: The cost of stuff is rising, but the value of your dollars is not. Pretty depressing. The price of a gallon of gas in 1995 was 90 cents; in 1962, it was 35 cents. In 2017, the national average is around $2.50 – a 178 percent increase from 1995 and a 614 percent increase since 1962.
How about a burrito from Taco Bell? You paid 69 cents for that guilty pleasure in 2002, but in 2017, you’re shelling out $1.50.
Rising prices over time wouldn’t be a big deal if the purchasing power of your dollars was rising as well. But it isn’t. The only way to battle inflation is to make more money, but for most U.S. workers, real wages – that is, after inflation is taken into account – have been stagnant or even falling for decades (the famous middle-class squeeze).
What $1 Million Is Really Worth
The cost of grabbing a burrito for lunch and filling the tank with gas gives a very micro-level picture of the effects of inflation. But what about larger sums of money? In 1980 – 37 years ago – to be a part of the elite 1 percent club you had to earn around $225,000. Today, you need annual earnings of $465,600. That $225,000 is still impressive – you’re in the 5 percent club today, but not quite as impressive as it once was.
To be the equivalent of a 1980 millionaire in 2017, you need to have almost $3 million – $2.97 million to be exact. That’s a 197 percent increase over just 37 years.
The Impact on Retirement
There’s more to this than simply a discussion of status. Nobody feels sorry for the person who drives a C-Class Mercedes instead of an E or S because of the ill effects of inflation. But there are real impacts to a family’s bottom line.
- Take retirement savings. Each person needs a large amount of money saved to retire comfortably. One study found that the average retiree spends about $3,700 per month in 2016 dollars. The current worker planning to retire in 25 years might need nearly $8,800 per month to live the same comfortable lifestyle.
- Social Security will cover some of these expenses, and $8,800 represents no more than an educated guess, but the point is the same. Forecasting how much money you’ll need for future purchases has to include a discussion of inflation.
- Your investing plan is affected by inflation. If you’re the ultra-conservative type and keep your money in a run-of-the-mill savings account, your money is losing value. In 2017, the average savings account interest rate was 0.06 percent. If you’re lucky, you’d get up to 1.30 percent. Yet the average rate of inflation is around 2 percent, and to break even on your investments, you need to earn at least the rate of inflation.
What does all this mean? Yes, $1 million isn’t what it used to be, but even more important, no financial plan should be based on a single number. Just because your parents retired comfortably on a certain amount of money doesn’t mean you can. That doesn’t mean you can’t build wealth. It just means that you have to continually adjust your expectations and plans.