Every so often, a website puts together a gimmicky article and releases a press release. Then other publications pick up and talk about it. For years, Salary.com came up with a total salary for a mother around Mother’s Day. The did this from 2009 until 2019, but it has been more sporatic since then. They add up all the responsibilities that mothers typically do, such as being a part-time van driver or a chef. It’s hokey, but fun.
The latest piece of link bait is Investopedia’s $5 Million American Dream and I’ve fallen right into their trap. We know the inflation has run amok lately, so it makes sense that living well would cost more. When I was growing up in the 1980s, a millionaire seemed like a magical rich person. That was perhaps partially because I was younger, and earning $20 a week with a paper route was great money. However, a million dollars went a long way back then. Using the government’s CPI calculator, a million dollars, is worth $2,991,468.14. (Can we round up to $3M?)
Before we get started, we have to determine what the American Dream is. My dream is probably not the same as yours. Investopedia went to the source, James Truslow Adams’ 1931 book, Epic of America, which coined the phrase. Ironically, he was writing it soon after the Stock Market Crash of 1929. His idea of the American Dream was:
“that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement. It is a difficult dream for the European upper classes to interpret adequately, and too many of us ourselves have grown weary and mistrustful of it. It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.”
Investopedia translated that into the following categories:
- Retirement
- Healthcare
- Owning a home
- Raising two children and paying for college
- Purchasing new cars
- An annual vacation
- Owning pets
- Paying for a wedding
At first glance, it seems like some of these things can vary greatly. A wedding can cost about $100 (for a justice of the peace) in a living room. A wedding planner whom I recently talked to once planned a $500,000 wedding. That may seem extreme, but almost all of these depend largely on your choices. Maybe healthcare is the only one that doesn’t, as it factors in a lot of luck.
That’s something that Investopedia points out, so it uses a variety of sources to get its information. Here’s how it breaks down:
First off, I want to know who the 14% that don’t want affordable, quality healthcare as part of their dream? Maybe some of the younger people aren’t thinking much about healthcare. That’s about all I can think of.
The other thing that’s important to note is that all these costs are from 18-84… well, except for retirement. The weird thing is that inflation is going to be a vastly different thing for a 20-year-old vs. an 82-year-old. I have to think that these numbers are for an 18-year-old going forward, because an 82-year-old has already spent most of the money in these areas. But if we are using an 18-year-old as the guide, then the $5 million number doesn’t seem so shocking. In 1985, the concept of $3 million seemed absurd. It should be surprising that $5 million in the 2060s is the new barometer for being “rich”.
For fun (yes, my idea of fun is different than everyone else’s), I decided to sketch out a scenario where an 18-year-old got a windfall. How big would that windfall have to be to carry him through the $5 million that the American dream will cost? I assume that this person would invest the money and earn 7% compound interest over the 66 years of their life (using Investopedia’s age 84 number). It turns out that over that much time, your money would multiply 87 times – one dollar would grow to $87. Working backwards from $5 million, the windfall necessary on the 18th birthday would be only $57,471.
That comes with the important caveat that you wouldn’t be able to leave the money compounding for 66 years. Getting to $5 million at age 84 while being homeless, no spouse, no family, no vacations, no cars, etc., certainly isn’t the American Dream. However, this also assumes that you wouldn’t invest any more money for the rest of your life. Obviously, the real-world calculation is a lot more complex. Doing that math is no longer my idea of fun.
Final Thoughts
One of the biggest takeaways I had from this is that we can’t estimate what expenses will be like far, far in the future. We might be able to estimate inflation at 3% over a span of 40 years, but you are not an average. You won’t necessarily have two kids or a pet. Maybe you’ll want the fanciest car.
The world itself changes a lot in 40 years. Healthcare and college costs look very different now than they did back then. In fact, healthcare for many may look very different in six months, depending on whether Congress can extend the ACA subsidies.
Retirement itself was very different back then. The 401 (k) was a very new thing, and Roth IRAs wouldn’t exist for another decade. They weren’t as necessary because employers offered pensions. Social Security was a government guarantee that you could depend on back then. It may be less going forward.
The only constant is change. Life would be boring without it. Fortunately, it usually happens slowly, giving you time to adjust.
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