One Million Dollars!

“One million dollars…” says Dr. Evil in one of the classic comedy lines of all time.  So full of irony because in his original timeline, prior to his hibernation for decades, one million dollars was an unimaginably large sum.  But in today’s dollars, even though its big money, it is a laughably tiny  ransom for saving the world.  In a world where student loan debt is in the trillions and a single stealth bomber costs over a billion, a million dollars is chump change in comparison. 

But strangely, not in the world of personal finance.  In this space one million dollars is still treated as a sacred cow.  It is considered enough, even more than enough, by most people to finance a rich life free from the requirement of ever having to work again. And what is so strange about that is that it has been a fixed quantity for decades, with no sign of being replaced.  In engineering we have a set of constants referred to as dimensionless numbers.  They are constants by definition, held in place by the very forces of nature and you can trust they will always have the exact same value in every equation in which they appear.  In the world of personal finance one million dollars has become this kind of constant. 

Why is this?  What’s the magic in a million?  The obvious explanation is we live in a numerical base 10 world and one million written numerically is very impressive.  $1,000,000 is an impressive number just to look at.  All those zeros and multiple commas!  Compare it to the other numbers we use most commonly.  A gallon of gasoline in Arkansas is $2.19, it probably costs more where you are but I’m sitting on top of an oil field.  A postage stamp costs $0.55, not that anyone writes letters any more.  A new Toyota Avalon costs $42,497 locally for the loaded, limited model.   The median house price in the US is only $200,000 by comparison.  So another possible explanation for the attraction to seven figures is that a million is much larger than the amount of money we ever handle in a single transaction.  I mean who buys five houses at one time? 

At my former job, prior to retirement I paid invoices over a million dollars every month.  Both the monthly electricity bill and the natural gas bills were over one million dollars.  When we added some new equipment to the plant it typically cost from twenty to one hundred and fifty million dollars to build.  I became a little numb to just what a million dollars meant because it was small change in the chemical plant world.

When I retired I was one of those  401K millionaires that everyone thinks are mythical.   I was in my 401K for about thirty years and often wasn’t allowed to contribute the legal maximum due to some federal back testing of our plan. I still accumulated quite a bit more than one million dollars due to my contributions and the growth of the mutual funds I invested in.  It made me feel like I was rich when I first saw on paper that I was a millionaire. 

After I retired slightly early and moved that money to Vanguard it became even more real.  Because of an idiosyncrasy in our retirement system, Wells Fargo had to write a check in Vanguard’s name and mail it to me for the entire balance of my account.  Then I had to mail the check on to Vanguard myself.  I don’t know if Wells Fargo and Vanguard just didn’t know how to play together nicely but whatever the reason that is what I had to do.  As a note of caution, that’s not the right way to do things.  You should go with a direct transfer from your 401K to an IRA when you retire.  If you accept the money yourself and do not reinvest it immediately you could become responsible for paying income tax on the entire amount.  That would be bad! 

 As long as I live I will never forget when I opened the envelope and held that check that represented thirty years of contributions and growth in my hands.  It was for the amount of one million four hundred thousand dollars!  It was hard to describe what that feels like, holding a million dollars in your hands, that you own.   I just stood there and stared at it for a few minutes.  I already knew I was a millionaire, I already knew exactly what the check would have written on it, but I was overwhelmed with the magic of holding a million dollars in my hands.  I almost let out a Dr. Evil sinister chuckle myself.

So I get the attraction of that number.  I felt it as I held that much of my own money in my two hands. And even though I had routinely signed off on much larger amounts at work this was different, this was my money!  It has been very real to me ever since that day four years ago.  In fact it started even earlier than that when my dad’s assets transferred to my brother and me.  That was also roughly a million dollars given tax free to each of us.  There is no joy in inheriting money from wonderful parents like mine.  But there is an awesome sense of responsibility when it comes to using that money wisely. Money that a strictly middle class couple saved and invested wisely throughout their frugal lives.  

I suppose you could say I have had two different million dollar encounters over the last ten years and they have taken something that is hypothetical for many people and made it quite concrete for me and my wife.  Maybe I should say three encounters because we also had significant after tax investments that amount to another seven figure plus account in addition to those two, as well as sizable Roth’s and regular IRA’s.  So in my position, unlike many, I don’t see one million dollars as a tremendous amount of money. Certainly inheriting that much did nothing to change my lifestyle or my financial independence which had already been adequately funded.  

To the lean FIRE crowd, those who can live on $2,000 a month, a portfolio of as little as $600,000 can safely fund their retirement, others feel comfortable with as little as $400,000 or even $250,000.  If they plan on earning some money after retirement, like me, then they can get by, perhaps, with even less.  In their economic value system one million dollars is huge. It is much more than they could conceive of spending unless they drastically inflated their lifestyle.  For a fat FIRE devotee who might perceive needing an annual income of $300,000 (I’m talking about you Financial Sam) a safe withdrawal rate would indicate that they need seven or eight million dollars, maybe even more if the stock market hits a prolonged cooling off period and bond rates stay low.  Those would gladly accept one million dollars but it would not impact their financial lives much at all.

All that is to say one million dollars is a very subjective concept. In today’s dollars it is significant, its even more than enough for many people.  But it is just a fraction of the goal for others.  However, there is another entirely different aspect to this fascination with this specific amount of money.  And that is time.  I’m an older guy, hate to admit that but it is true.  I’m the guy millennials think of when they say “OK boomer”.   I started my career decades ago, before cell phones or the internet.  You can imagine the changes I’ve lived through .  But one thing that hasn’t changed is that one million dollars was the touchstone for being rich back then, and it still is.

Think about that.  One million dollars holds exactly the same fascination for people today as it did fifty years ago.  And that is just plain weird.   Earlier I mentioned gasoline is selling for $2.19.  When I started my career it was selling for $0.65 a gallon.  Postage stamps cost $0.13 versus $0.55 today.  Today’s median house price of $200,000 was only $55,700 then.  Yet with those obvious changes in the cost of living from then to now how has the notion of being rich changed?  Nada, zero, zilch… It is still one million dollars.  We all seem to be like Dr. Evil in that respect, stuck in a time warp when it comes to what one million dollars is worth. 

 I think the writers of Dr. E’s line may have been very sly in hiding a nuanced joke inside of a joke.  The audience knows instantly that in the macroeconomic world, one million dollars isn’t all that and a bag of chips.  In fact it is laughable, hilarious to think of it as being an inconceivable amount of money.   But at the same time in our own microeconomic lives we think just that, one million dollars is infinitely capable of satisfying our every financial desire for the rest of our lives.  We can’t help it, it seems we have a mental block that prevents our minds from understanding an amount of money as large as one million dollars.  

We clearly get that inflation destroys value because we personal finance people are all about the time value of money, yet we don’t get it at all on an emotional level.  I was there back in those old days and I can assure you that one million dollars held exactly the same place in popular culture then that it does now.  And how crazy is that?  If gasoline and cars and houses all cost three to four times as much now as they did then, then why do we still hang on to one million dollars as the touch stone of prosperity?  Especially when you look at the value of one million dollars the year I left college and started my career.  One million dollars back then was worth four million dollars of today’s money.  But nobody uses four million as the magic money goal now, instead of one million.

I think it mirrors a lot of other societal changes.  Take grade inflation in our school system.  Kids are not smarter now, at least there is no evidence to say that babies are born with appreciably higher IQ’s now than in the past.  Yet in four year colleges approximately 15% of all class grades were A’s in the 1960’s.  By 2013 almost 45% of all grades awarded were A’s.  How do the number of A’s increase when the level of college preparedness drastically declined over the same period.  In the 60’s only the privileged and well prepared attended college while now, scholarships and financial aid have made college available to a much broader group of students, including many whose high school experience did not leave them well prepared.  Yet they are still making three times as many A grades?  Few would argue that the improved performance is real, instead most experts concede that what is real is grade inflation.  The reason seems to be due to a variety of social pressures on the teachers and institutions, which started as an effort to help Vietnam era male students avoid the draft,  and which have continued to erode the standards of excellence in higher education. 

In education it is easy to conceive of many reasons why teachers and universities might ease their standards over time.  “The customer is always right” is a truism for all business and higher education is a business.  The customers are the parents, and to a lesser extent the students who are paying for college.  And they want A’s, they want high grade points so they can attain good employment.  In fact it starts well before college.  High school parents and kids demand better grades to get into the college of their choice.  There is enormous social pressure to ease standards, as evidenced by the recent celebrity indictments over bribing officials to get into good schools. 

You might ask what does grade inflation have to do with real economic inflation?   Nothing really, that isn’t my point at all.  My point is that the attitude that drives grade inflation has everything to do with why one million dollars is still a thing.  The attitude that important goals have to be easier to achieve.  Because hard stuff is, well it is too hard.  Hard stuff leaves most people out, it makes more losers than winners and that just isn’t very nice.   It is why they do not keep score at T ball for little kids and  why something called a participation trophy even exists.  And don’t think I’m judging, I got a participation medallion for every marathon I ran, but only once did I receive a trophy for placing in my age class. So I’m not immune to the lure of easy goals.  I was proud of finishing all of those races even if I was never in contention for winning.  

So what does a million dollars really mean?   More than enough for many, just enough for others and nowhere near enough for the rest?  It is basically $250,000 to someone of my age because inflation has eaten away 75% of every dollar’s buying power during my adult life.  Yet it endures as a symbol of affluence and success.  A very interesting thought question is at what point will it dawn on enough of us that $1,000,000  can not continue to hold its place in popular culture?  Will it be when the median house price exceeds one million dollars?  That’s already close to happening in a few of the most expensive cities in the world. At some point, well into our future, one million dollars will not be remotely enough for even the most frugal person to retire with. Will that be the day that being a millionaire stops meaning anything?  And what will take its place then?

As usual I do not have any answers, I just like asking questions. I do think the million dollar standard has endured in part because almost anyone really could retire with much less than that fifty years ago, so it was a way oversized landmark back then.  Over time we’ve sort of grown into it as being a realistic amount to represent affluence.  Even today it is more than enough for most people, which is good because it is also way more than most people will ever have.  The concept had strong legs.  It is only recently when it has started to show its age and has begun to wobble a little.  I think it is a given that in another fifty years it will not hold the same place in our culture as it does today.    But for now, being a millionaire still represents a milestone of financial success.

What do you think about one million dollars?  Has it outlived its place in our culture as THE economic number?  

Have you ever projected what one million dollars will buy when you reach your planned retirement age? 

How can a standard that has dropped in value by 75% still be the standard? 

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