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What Kind of Millionaire Do You Want To Be?

By JLP | December 21, 2006

The January issue of Money has a section about reaching various goals. They (Money Magazine) took a poll to find out what sorts of goals people had set for themselves. One of those goals was “…to become a millionaire.” In that section, they have a little chart that shows how much you need to save each month based on your current age in order to become a millionaire by age 60. Their graphic looks something like this (I added the “20” column and a 12% and 10% ROR category):

Retirement Goal With No Inflation

The problem with this is that they are ignoring inflation. If inflation runs at modest 3% per year, $1,000,000 will only be worth $543,794 in 20 years and only $295,712 if you go out 40 years. So, although you will be able to call yourself a “millionaire,” you will only have the purchasing power of half a millionaire.

What kind of millionaire do you want to be? A millionaire in name only or a millionaire in purchasing power? If you want to be a millionaire in purchasing power, you’re going to have to save more money. How much more? Let’s see.

I took Money’s numbers and adjusted them to reflect inflation. For illustrative purposes, I put together three graphics to reflect three different levels of inflation: 3%, 3.5%, and 4%.

With 3% Inflation…

Retirement Goal With 3% Inflation

With 3.5% Inflation…

Retirement Goal With 3.5% Inflation

With 4% Inflation…

Retirement Goal With 4% Inflation

As you can see, the numbers are quite a bit different from the numbers Money gives us. If you are currently 40 and you want to be a true millionaire by age 60, you will need to save $3,066 per month (or $1,368 more per month than Money’s example), assuming an 8% return and a 3% inflation rate. It’s not nearly as much if you can get a higher rate of return. HOWEVER, trying to get a higher rate of return includes taking on more risk and there’s also no guarantee that you’ll get that return.

So, what’s a person to do? Start saving, and start saving now. Don’t put it off. If you are in your 20s and are reading this post, thank God that you are young enough to have time on your side. Don’t waste it. The sooner you start saving, the less you have to save.

Topics: Investing, Retirement Planning | 13 Comments »


13 Responses to “What Kind of Millionaire Do You Want To Be?”

  1. Jonathan Says:
    December 21st, 2006 at 1:53 pm

    I’m 22 and I’m saving, but man, it’s gonna take some time, lol.

  2. Marshall Middle Says:
    December 21st, 2006 at 4:01 pm

    Excellent post – you always provide insight and crunch the numbers which is much appreciated. I’m 27 and am just getting a handle on saving, my goal is a million (purchasing power) but $2000 a month is a bit more than I can handle right now. I’ll have to work my way up to maxing out my 401K and Roth IRA, then I’ll be in good shape.

  3. BD Says:
    December 21st, 2006 at 6:28 pm

    Are these figures monthly? You never say.

    Also the first graphic says “Reflects 3% inflation” even though your write-up makes it sound like it doesn’t.

  4. Enough Wealth Says:
    December 21st, 2006 at 6:49 pm

    Yeh, well as a 45-yr old I think your idea of a “true” millionaire being $1,000,000 in 2006 dollars is a hoot.

    People were talking about “millionaires” when I was a kid, and if your inflation adjust $1m of 1970 dollars into 2006 dollars you’ll get a shock.

    I’d say that to update how much is needed to be a “true” millionaire you’d have to look at when the term “millionaire” first came into common use – perhaps around 1900 (eg. Rockerfeller et al). If so, todays “true” millionaire probably needs to accumulate $100m in 2006 dollars to “qualify”. (I haven’t bothered looking up the inflation figures for last century, so it could be $50m or $1b).

    It’s more important to work out a meaningful goal, than to try to “define” what a true “millionaire” is. For example, work out what income you think you need to live off, work out a realistic ROR on an investment lump sump that would provide that amount indefinitely, and make that your “target”. Then you just need to inflate that target by the CPI each year to keep your goal in sight.

  5. JLP Says:
    December 21st, 2006 at 7:02 pm

    Enough Wealth,

    That was the whole point to my post.

    The term “millionaire” defines someone with a networth of one million dollars. True, a millionaire back in 1900 was significantly “wealthier” than a millionaire is today due to inflation. However, both are still millionaires.

    My point (maybe I didn’t make it clear) was that lots of people have the goal of becoming a millionaire. However, if their goal takes decades to come to fruition, their million will be worth significantly less than it would be worth today.

  6. JLP Says:
    December 21st, 2006 at 7:04 pm

    BD,

    Yes, they are monthly figures.

    Also, thanks for the catch on the first graphic. I fixed it. That’s the problem with coping graphics (sometimes I don’t catch everything).

  7. Mike Says:
    December 21st, 2006 at 7:06 pm

    Good article. It makes my teeth hurt when I read articles talking about the miracle of compounding when it comes to saving for retirement, but no mention of the horrors of compounding when it comes to inflation.

    Usually they say something on the order of “if you save $X / month from the age of 20 to 30 and then stop, you’ll have as much money at age 60 as if you wait to the age of 30 to start and then save $X / month until the age of 60″. Absolutely true (although they usually assume a high rate of return on your savings.) The reality is that your savings rate should not stay level, but increase along with inflation and your income.

  8. Russell Bailyn Says:
    December 21st, 2006 at 10:11 pm

    great post jlp. I find that explaining the need to save to people in their 20’s is like pulling teeth. If you can’t visualize your own retirement (or care enough to do so) you won’t be fully committed to saving. A good starting point would be a rise in the number of young people contributing to their retirement plans at work. But when you’re 25, what do you really think about? Having your own place, having a boyfriend/girlfriend, going out to eat, etc. I think 30 is when reality kicks in.

  9. Anonymous Says:
    December 21st, 2006 at 10:31 pm

    Speaking of inflation, one of the big news items a couple of days ago was the fact that the PPI (Producer Price Index) jumped 2% last month. That’s not an annualized 2%. It was 2% in one month. Although I don’t expect it to continue at that rate for long, compounded over a year, that’s a 26.8% inflation rate.

    I’ve been expecting this for a while. The Fed has stopped publishing some of the measures of the money supply. I don’t think it is a deliberate conspiracy to hide the fact that the government is printing money. That would show up in the M1. However, not reporting the M3 will make it harder to track the effects of Fed policy.

    The inflation rate is going up, and it is going to stay higher for a while. The talking heads are babbling about the PPI being artificially high because of fuel prices, or the end of rebates on 2006 car models, or whatever. I find that very interesting. Fuel prices should be a factor in the PPI, but I’m having trouble figuring out exactly how rebates to consumers play a role in it.

  10. sam Says:
    December 22nd, 2006 at 3:33 pm

    Either kind would be fine with me

  11. Keith Cash Says:
    December 23rd, 2006 at 3:51 am

    I agree with Sam. Both are ok.
    It will be nice to have millions in the bank when we hit 55. Then travel around the world in a boat. ( a dream )

    Cheers

  12. » Weekly Blog Roundup, Holiday Edition on Consumerism Commentary: A Personal Finance Blog Says:
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