The Path to One Million Dollars
You have a problem that you might not know about. This might be one of the most important concepts to understand about money.
I see this all the time, and it annoys the hell out of me. Personal finance influencers tell you:
“Save $1,000 every month, and in 21 years, you’ll have $1,000,000!”
What they’re not telling you is that in 21 years, $1M will only be able to buy ~$450,000 worth of stuff due to inflation and money printing. That is not enough to retire.
For those who are new to these concepts, let me explain:
Imagine you set out to save for retirement. You start with $10,000 and contribute $1,000 a month to the broad US stock market – the S&P 500. Let’s be generous and assume your annual growth rate is 12%.
Initial investment: $10,000
Monthly Contribution: $1,000
Annual return S&P 500: 12%
In 21 years, you contributed a total of $262,000, but due to the growth of the stock market, you have $1,088,423.31. Hooray!
But wait…in 21 years, that $1M is not actually worth $1M.
Ex-Goldman Sachs hedge fund analyst Raoul Pal breaks it down in this tweet:
What he’s saying is that ~3% might be the reported inflation, but the government is ALSO printing money at an average rate of 8% a year.
When they print money, it lowers the value of the dollar, so things you buy with the dollar seem more expensive.
With inflation and money printing (debasement of currency) combined, you have a ~12% annual loss in purchasing power.
In other words, you are getting poorer by ~12% a year if you are not investing or if your salary is not increasing by that much.
This is why housing prices, the cost of living, childcare, travel, etc. seem so expensive compared to several years ago.
This proves my point:
- Median cost of a house in the U.S. in 2003 (21 years ago): $186,000
- Median cost of a house in the U.S. today: $417,300
The rich understand these concepts and adjust accordingly. Unfortunately, the average person does not, and they are getting left behind.
Let’s go back to our example:
In 21 years of investing, you contributed a total of $262,000, and due to the growth of the stock market, you have $1,088,423.31.
Let’s be generous and say they print less money in the future and inflation comes down. So now we lose ~7% of our purchasing power per year
12% growth of the S&P500 – 7% loss of purchasing power = 5% real growth
So in 21 years, your $1M will only be able to buy ~$450,000 worth of stuff. That is not enough to retire comfortably in the U.S.
The implication is that if you do not have alternative income streams and invest in assets with above 7% growth, you are running on a treadmill and will forever need to keep working to maintain your lifestyle
That is the reason why the United States (and even worse in the rest of the world) has a retirement crisis.
Luckily, we have financial education to help us get ahead. Plus, there are faster horses to help us accelerate our wealth (hint, hint – one among many is Bitcoin and crypto).
More to come in future articles.
Cheers,
Ekene (KK) Nwosu
