It’s a nice, solid number. One million dollars, for many people, represents a target net worth. For others, it’s a place to start.
But practically, in 2022, is one million dollars a reasonable target? What if you live in a high cost of living area? Unfortunately, one million dollars has very different buying power now than it did twenty years ago. This is because of the persistent erosion of value caused by inflation.
One million dollars in 2020 is like 1.7M dollars in 2022
If you haven’t heard, the economics story of 2022 has featured inflation at levels we haven’t seen in a generation. Inflation is a process which decreases the purchasing power of money over time.
In the last year alone, from August 2021 to August 2022, the consumer price index (CPI), which reflects the prices paid by an urban shopper for a basket of goods, has increased in all categories by 8-23%.
In practical terms, this means that you’ll be paying 25% more for energy for your home and transportation than you did last year.
Despite its the clear loss of purchasing power, one million dollars in investable assets remains a goal for many people to achieve. Why is this?
Why would you want to be a millionaire?
Let’s define millionaire as someone who has investable assets exceeding one million dollars outside their homes. Why do people seek to achieve that goal? There are numerous reasons, and below I’ll explore them.
Millionaires are financially independent
Many but not all people who have investable assets exceeding one million dollars are financially independent. This means that they have sufficient income from investments alone that they do not have to work for wages. It doesn’t mean they DON’T work – only that if they needed to stop working, they could.
How can this be? Their money is making money for them. Financial independence means building your own money machine by purchasing the right investments. Some investment vehicles create income intrinsically; these are called income generating assets. These include dividend stocks, real estate properties or REITs, and bonds.
Each investment vehicle offers a different return profile and has different tax implications. In a dividend stock portfolio, in which the investor has only plans to live off the dividends of their Coca-Cola stock, $2M worth of stock yields $60,000 annually before taxes.
On the other hand, $1M worth of real estate with 10% cash-on-cash return may yield $100,000 annually before taxes.
Millionaires Live Longer Lives
This is a strong claim but I do find data to substantiate that millionaires live longer than people of lower socioeconomic status. One famous study from 2018 found that people working in service professions had double the risk of dying from cardiovascular causes compared to business-owners.
In another study that same year, a large British cohort was studied for new diagnoses of dementia over twelve years. The 6220 individuals were divided into groups based on a combination of their overall wealth and educational attainment. The top quintile had median net worth of $255,000. Compare this to the lowest quintile with median net worth of only $170. After studying these groups for the next dozen years, researchers found that the least wealthy group had a 68% higher rate of developing dementia than the most wealthy group.
Studies of wealth and its effects on longevity are always complicated by education and lifestyle. But isn’t that the point? Having more wealth creates opportunities for rest and self-care. Think about the Queen of England and her husband, Prince Phillip, who both lived to be nearly 100 years old. It’s a complicated issue, but I don’t doubt being a millionaire enables people to live longer lives.
Is One Million Dollars Enough?
For those just starting out, seeking to create one million dollars in investable assets can be a challenge on its own. For others who have been saving for years and benefited from strong headwinds in real estate and equities in the last ten years, one million dollars is a foregone conclusion.
Once you’ve got one million dollars, will it be enough?
As we talked about before, inflation has reduced the purchasing power of $1M substantially in the last twenty years. According to the US Bureau of Labor Statistics, you’d need $1.7M dollars to achieve the same purchasing power in August 2022 that you had in January 2000. How much will you need in 2032 to achieve the same purchasing power as you have in 2022? And will you have that much saved? Investing over many years will help reduce the effects of inflation.
Furthermore, the allocation of funds is significant in determining how much is enough. A one million dollar Coca-Cola portfolio produces less income than a real estate portfolio worth the same amount.
Finally, there’s the individual investor. Have they paid off their home? Do they have health insurance? How much will they need to live a comfortable life?
For many investors, one million dollars will yield an income of $30,000 to $40,000. This amount may be adequate for some people. In my opinion, $30,000 annually is insufficient to pay for niceties, travel, and expensive prescription medications. One million dollars isn’t enough unless it’s well allocated and can produce upwards of $60,000 annually.
One million dollars is a goal post
Rather than the end, one million dollars is an important milestone for investors. It means that the method has been set. The game will be won, barring catastrophe. What I mean is this: if you’ve managed to create one million dollars in assets, then you know how it’s done. You can save, you can invest, and you can do it consistently.
The next million will not require the same trial and error as the first. There’s less of a learning curve. Maybe you will continue to work and will enjoy a higher income as you save the next million. Or maybe you will stop saving and allow the funds to grow. That’s a thing – it’s called Coast FI or Coast FIRE. It means you don’t have to save anymore because your investments will grow on their own to create financial independence for you.
On the other hand, not everyone retires with one million dollars. Mr. Money Mustache himself retired at closer to $800,000 in investable assets.
What do you think? Is one million dollars enough?
