The term, “millionaire” still sounds impressive today, but should it really? Due to inflation, the purchasing power of a million dollars is decreasing every year. If you are planning to scrimp and save your way to millionaire status 40 years from now, will that million bucks even be enough for you to stop working? What will that future money be equivalent to in today’s dollars?
The Rise of Inflation
It is said that in order to have a thriving economy, we must have inflation. A healthy economy typically sees GDP growth of at least 2.5%-3.5%. With that economic growth, inflation is needed in order to increase the gap between the growth of production and the growth of wages, thereby increase the overall “profits” for our country. In other words, if the inflation rate is 3% and the average wage increases by 2%, then wages have actually been reduced throughout the year and therefore make for a more profitable country.
According to Inflation Data, the average inflation rate since 1913 has been 3.22%. This means the price of goods are increasing at an average rate of 3.22% each year, which essentially means that you can buy less with the same amount of money.
In other words, let’s say that you have $100 and you have a love affair with Twix candy bars. They currently cost $1 a piece, so with your one hundred dollars you can by 100 of them and chomp them down before dinner time! However, next year inflation happens (at the 3.22% average) and the price of your Twix bar increases to $1.03. At this price, you can only buy 97 Twix candy bars. The next year, the price increases to $1.07 and you’ll only be able to buy 94 of them.
Year after year, your $100 buys you less and less food because the prices continue to rise. This is why investing is so important. In order to truly gain buying power with your money, then you must increase your savings by at least 3.22% each year. If you simply stuff your money under your mattress because it’s safe, you are effectively losing 3.22% of your money each and every year. Investing your money well is essential to your retirement savings. After all, even if you save a million dollars, it still might not be enough to live on throughout your many years in retirement.
What Will $1,000,000 Be Worth When You Retire?
When do you plan to retire? How many years away is that? And how much will this rate of inflation affect your retirement savings?
I am currently 29 years old. For simple math, let’s say that I plan to retire when I’m 69, which is roughly 40 years from now. If my benchmark was to earn $1,000,000, how much purchasing power with that get me in those future years? In other words, what would its equivalent be in today’s dollars?
To figure this out, let’s use the Rule of 72. The Rule of 72 is a simple way to estimate how long it will take for your money to double given a certain interest rate. But, in these certain circumstances we can also use it to figure out how long it will take for inflation to double the costs of goods as well. To use the Rule of 72, simply take 72 and divide it by the amount of the interest or inflation rate. If the rate was 7.2%, then we would take 72/7.2 and discover that it would take 10 years for an amount to double.
72/7.2 = 10 years
So what about our average inflation rate of 3.22%? At this percent, how long will it take prices to double?
72/3.22 = 22 years
In 22 years, your savory Twix bar will likely rise from $1.00 to $2.00, and you’ll only be able to buy 50 of them. When talking about Twix bars, you might just shrug your shoulders and say, “Meh, I don’t really need Twix bars anyway.” But this rate of inflation has a tremendous impact on your retirement as well!
In 40 years (my timeframe until retirement), the general cost of products will nearly be four times the cost! For you see, after 22 years the costs double, but then after another 22 years, they double again, which means the cost of products will then be four times the amount! So what does this mean for my million bucks? It might be called a million dollars when I reach retirement, but its purchasing power is more like $250,000 today (4 times less). And, if I live simply on $250,000, I’d be lucky to stretch this amount to 10 years. Either I die at this point, or I run out of money! Not good!
You’d Better Plan to Be a Multimillionaire
No matter when you retire, I would suggest that you plan to have more than $1,000,000 in your retirement account. After all, even in your retirement, things will continue to get more and more expensive. If you plan to retire tomorrow on your 65th birthday and live to be older than 87 years old, then all the costs of goods will be doubled at that point, and they all got progressively more expensive during your retirement! This could obviously be detrimental to your savings account over that span of time.
While you are earning healthy amounts of money today, please remember to save and invest. And when you earn money on your investments, reinvest those earnings and let them continue to grow exponentially. Instead of living in a small condo and eating Ramon noodles in your retirement, I want to see you living on a lake and grilling up some steak! Plan for your future today and have a wonderful retirement lined up for your future.