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The Millionaire Delusion

"Who wants to be a millionaire?" Regis Philbin posed that question when the popular program of the same name hit the U.S. airwaves in 1999. The show had originated the year before in the U.K. and eventually created a worldwide craze, with spinoffs in more than 70 countries -- a diverse roster of places that included Iceland, Kazakhstan, Nigeria, Thailand, and Uruguay.

Whenever I sneak a peek at a Millionaire episode -- the show is still around and now hosted by Meredith Vieira -- I'm always reminded of the shrinking value of the grand prize. Consider this: In 1999, the Consumer Price Index, or CPI, averaged 166.6. Today, the CPI has risen to 210.036. (Last year, our fussy Uncle Sam began calculating to three decimal places.) A bit of simple math tells us that a cool million today has the purchasing power of only $793,197 compared with Regis' original jackpot (166.6 divided by 210.036 equals 0.793197). Wow! In eight years, $206,803 evaporated into thin air. Any embezzlement of a pile of money that large would have the police swarming. But the villain here is inflation, and handcuffs don't work on that bad boy.

The million-dollar retirement
These numbers illustrate a sobering reality. Inflation and the constantly rising cost of living jeopardize our long-term goal of financial independence. Sadly, the problem is worsened by the "millionaire delusion" -- the exaggerated sense of value that people attach to the "m" word. Programs like Who Wants to Be a Millionaire? target our childlike spending fantasies. And yes, today's million is a still a healthy chunk of change. But as tomorrow's retirement nest egg, a million is a lot less than most people realize.

Let's take a moment to calculate the future purchasing power of $1 million. During the past 20 years, inflation has averaged a relatively tame 3%. But over the past half-century, it has averaged about 4%. Here, then, is a look at some retirement scenarios over the next 40 years:

Years to Retirement

3% Inflation

3.5% Inflation

4% Inflation

Retire Now




































Now let's run the numbers in reverse, to see how big of a retirement nest egg you'd need to retain the purchasing power of $1 million today.

Years to Retirement

3% Inflation

3.5% Inflation

4% Inflation

Retire Now




































For example, if you have another 25 years to work and hope to retire with the equivalent wealth of today's entry-level millionaire, you'll need to accumulate between $2.09 million and $2.67 million.

Investing for inflation
The key to inflation-beating wealth creation is a portfolio that grows more quickly than inflation. That sounds like no-brainer advice, but the devil is in the details. Consider a hypothetical viewer who was inspired by the premiere episode of Who Wants to Be a Millionaire? The following day, Aug. 17, 1999, he invests $1,000 each in several blue-chip stocks.


Total Return Since 8/17/99

$1,000 Becomes:

Adjusted for Inflation:

Citigroup (NYSE:C)




General Electric (NYSE:GE)




Johnson & Johnson (NYSE:JNJ)




Coca-Cola (NYSE:KO)




Microsoft (NASDAQ:MSFT)




Procter & Gamble (NYSE:PG)








Portfolio Average




Performance data from Yahoo! Finance through 1/15/08.

More than eight years later, the nominal return of this portfolio is 23%. But if you adjust the return for inflation -- the real return, in economists' lingo -- it's a negative number: minus 2.4%. The purchasing power of the original $7,000 has actually shrunken to $6,829.

So where did our investor go wrong? His picks were familiar names among the giants of the S&P 500. And therein lies a clue. Even though the portfolio included several sectors (financials, industrials, health care, consumer staples, technology, and telecommunications), it still lacked diversification. Entirely missing were small-cap stocks, REITs, and international equities. Since the Millionaire series debut, the Vanguard Total International Stock Fund has gained 46.2%, and the Vanguard REIT Index 123.2% -- and that's after adjusting for inflation!

There are two lessons here. First, you should never be satisfied with just breaking even, because after inflation, you're usually losing money. Second, a diversified portfolio is essential to preserving the purchasing power of your retirement nest egg. Only with a portfolio that encompasses a wide range of assets can you expect to see real growth in your net worth.

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