Yet another sign of the effects of inflation on the American public: Even being a millionaire ain’t what it used to be.
That statement might come as a slight exaggeration. But a recent article on the growing number of Americans with seven-figure balances in their retirement accounts demonstrates the dynamic that many savers, including this one, face: These days, a million-dollar 401(k) doesn’t guarantee a cushy retirement.
Stock Market Boom
The Wall Street Journal article highlighted how the recent stock market boom, coupled with increases in the savings rate into retirement accounts, has led to rising balance totals. Fidelity counted 654,000 401(k) millionaires as of the third quarter. T. Rowe Price reported the percentage of participants with seven-figure balances has doubled since the end of 2022. And UBS Global Wealth Management estimates that roughly 1,000 Americans joined the millionaire balance club every single day last year.
But UBS also calls many of these individuals “moderate millionaires,” for the simple reason that the milestone has more of a psychic effect than a practical one on households’ spending power. As a UBS analyst wrote to clients:
Popular culture still thinks of millionaires in terms of Scrooge McDuck or the top-hatted icon of Monopoly [i.e., Rich Uncle Pennybags]. … The new dollar millionaires have broken a psychological wealth threshold, but their income and spending is that of middle-class households.
Paper Gains?
Having reached this milestone at some point in the past couple of years (I don’t check my retirement account balances obsessively, so I don’t know exactly when), I can attest to this mentality. I consider myself lucky and fortunate to have saved a nest egg, but you won’t find me retiring to a private island any time soon.
First off, as I noted a few weeks ago when President Trump cited 401(k) balances as a response to public concerns over inflation, my retirement accounts shouldn’t pay for my expenses now. And as a practical matter, they can’t. If I liquidated my retirement accounts immediately, the taxes and penalties resulting from those moves would leave me well short of $1 million.
That means I, like most other Americans, have to wait at least 15-20 years to even consider touching the balances in my retirement accounts. Given that 15-20 years ago, we were in the middle of a stock market meltdown, a lot can and will happen between now and then. In the meantime, people shouldn’t make decisions assuming that what they have now will suffice for a comfortable retirement. Because math suggests it won’t.
Inflation’s Effects Over Time
I previously noted that inflation meant $1 million had lost nearly half its value from August 1999, when Who Wants to Be a Millionaire? became a cultural phenomenon, to the summer of 2024. Logically, that $1,000,000 will lose nearly half its value again over the next quarter-century, roughly the time when I will enter retirement. All of which means that, while $1 million might have financed a comfortable retirement when I entered the workforce 25 years ago, it won’t 25 years from now.
Think about it: Assuming a 3-4 percent withdrawal rate, someone with a $1 million nest egg in a 401(k) could safely spend $30,000-$40,000 per year in retirement. That amounts to $3,000 a month, give or take, before taxes kick in. Given high living costs these days, not to mention the ever-rising cost of health care, that kind of income might allow a frugal retirement but certainly not an extravagant one. (As to whether and how much Social Security will provide in retirement benefits for future generations, that’s a topic for a whole other article.)
By contrast, the Journal cited UBS to note that “spending like a ‘stereotypical millionaire’ probably requires at least $5 million.” That amount should finance withdrawals of roughly $150,000-$200,000 per year in retirement — enough to fund a comfortable, perhaps even extravagant, lifestyle.
Need to Save
All this means that I, like most Americans, shouldn’t stop saving for retirement any time soon. Stock market gains will help, but harnessing those requires putting money into 401(k)s and IRAs to purchase shares in the first place.
To the extent Americans have become regular savers in their retirement accounts, they continue to show greater discipline than our “leaders” in Congress. All of which is a nice way of saying that if Americans, by dint of thrift and self-sacrifice, can become even “moderate millionaires,” they will do so despite the “help” provided by Washington rather than because of it.
