The Millionaire Delusion

"Who wants to be a millionaire?" Regis Philbin asked when the popular TV show of the same name debuted in the United States in 1999. The program had originated the year before in the U.K. and eventually created a worldwide craze, with spinoffs in more than 70 countries, including places as diverse as Iceland, Kazakhstan, Nigeria, Thailand, and Uruguay.

I caught a Millionaire episode earlier this week -- the show is now hosted by Meredith Vieira -- and began pondering the shrinking value of the grand prize. Consider this: In 1999, the Consumer Price Index, or CPI, averaged 166.6. Today, the December 2006 CPI number of 201.8 was announced. A bit of simple math (166.6 divided by 201.8 equals 0.82569) tells us that a cool million today has the purchasing power of only $825,570 compared with Regis' original jackpot. Wow! In seven years, $174,430 evaporated into thin air. An embezzlement of such a sum would have the police swarming. But the villain here is inflation, and handcuffs don't work on that bad boy.

When a million really meant something
Seven years is a very short time in your household's financial life cycle, so let's expand the timeline. Some of us older Fools remember the popular TV series The Millionaire, which first aired in 1955. Each episode began with Michael Anthony, the private secretary of multimillionaire John Beresford Tipton, presenting a gift of $1,000,000 tax-free to an astonished recipient. The rest of the episode explored the surprising and not always happy impact of instant wealth on the new millionaire.

Now flash-forward to the present. A quick calculation with historic CPI numbers shows that today's Millionaire jackpot would have to total more than $7,500,000 to equal the sudden wealth of Amy Moore, the widowed waitress who received the check in the first episode. But wait. Her 1955 check was tax-free (that is, Tipton paid the taxes). So let's revise our calculation accordingly. With today's top tax bracket of 35%, an equivalent check would actually be around $11,600,000. Being a millionaire then really meant something.

The million-dollar retirement
These numbers illustrate a sobering reality. Our long-term goal of financial independence is jeopardized by inflation and the constantly rising cost of living. Sadly, the problem is worsened by the "millionaire delusion," the exaggerated sense of value people attach to the "m" word. Programs like Who Wants to Be a Millionaire? appeal to 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 a million dollars. We can make estimates based on the expected rate of inflation and the number of years to retirement. 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 the probabilities over the next 40 years:

Now let's run the numbers in reverse to see how big your retirement nest egg would have to be to equal the purchasing power of a million dollars today:

For example, if you have another 25 years to work and aspire to retire with the equivalent wealth of today's entry-level millionaire, you'll need to accumulate something in the range of $2 million to $2.6 million.

Not there yet?
It's never too soon to start planning for retirement, especially if you answer "Me!" to the question "Who wants to be a millionaire?" To make sure you don't fall victim to the millionaire delusion, check out our Motley Fool Rule Your Retirement service. It's your absolute best source of planning advice, no matter where you are in your financial life cycle. Whether you're decades from your golden years or scrambling in catch-up mode, we have retirement advice, planning tools, and discussion-board experts ready to lend a hand.

Fool contributor Doug Short (aka TMFDoug) is a happily retired Fool who learned about inflation the hard way: raising a family through the double-digit price increases of the late '70s and early '80s. He's also an accredited asset management specialist and is available to answer questions on the discussion board at Rule Your Retirement. The Motley Fool is investors writing for investors.