Will a million be enough to fund your retirement?

"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.

Whenever I sneak a peek at a Millionaire episode — the show is now hosted by Meredith Vieira — I'm always reminded of the shrinking value of the grand prize. Consider this: In 1999, the Consumer Price Index, or CPI, averaged 166.6. Today, the CPI has risen to 210.036. That's right, last year our fussy Uncle Sam began calculating to three decimal places. A bit of simple math (166.6 divided by 210.036 equals 0.793197) tells us that a cool million today has the purchasing power of only $793,197 compared with Regis' original jackpot. Wow! In eight years, $206,803 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.

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? target 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. 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 some retirement scenarios over the next 40 years:

Years to Retirement	3% Inflation	3.5% Inflation	4% Inflation
Retire Now!	1,000,000	1,000,000	1,000,000
5	858,734	836,829	815,373
10	737,424	700,282	664,833
15	633,251	586,016	542,086
20	543,794	490,395	442,002
25	466,975	410,377	360,397
30	401,007	343,415	293,858
35	344,358	287,380	239,603
40	295,712	240,488	195,366

Now let's run the numbers in reverse, to see how big of a retirement nest egg you'd need to retain the purchasing power of $1 million today:

Years to Retirement	3% Inflation	3.5% Inflation	4% Inflation
Retire Now!	1,000,000	1,000,000	1,000,000
5	1,159,274	1,187,686	1,216,653
10	1,343,916	1,410,599	1,480,244
15	1,557,967	1,675,349	1,800,944
20	1,806,111	1,989,789	2,191,123
25	2,093,778	2,363,245	2,665,836
30	2,427,262	2,806,794	3,243,398
35	2,813,862	3,333,590	3,946,089
40	3,262,038	3,959,260	4,801,021

For example, if you have another 25 years to work and hope to retire with the equivalent wealth of today's entry-level millionaire, you'll need to accumulate between $2.09 million and $2.67 million.

Investing for inflation

The key to inflation-beating wealth creation is a portfolio that grows more quickly than inflation. That sounds like no-brainer advice, but the devil is in the details. Consider a hypothetical viewer who was inspired by the premiere episode of Who Wants to Be a Millionaire? The following day, Aug. 17, 1999, he invests $1,000 each in several blue-chip stocks.

Stocks	Total Return since 8/17/1999	$1000 becomes	Adjusted for Inflation
Citigroup (NYSE: C)	1.5%	$1,015	$805
General Electric (NYSE: GE)	13.0%	$1,130	$896
Johnson & Johnson (NYSE: JNJ)	60.0%	$1,600	$1,269
Coca-Cola (NYSE: KO)	25.0%	$1,250	$992
Microsoft (Nasdaq: MSFT)	(4.6%)	$954	$757
Procter & Gamble (NYSE: PG)	73.1%	$1,731	$1,373
AT&T (NYSE: T)	(7.0%)	$930	$737
Portfolio Average	23.0%	$1,230	$976

  Performance data from Yahoo! Finance through 1/15/2007

More than eight years later, the nominal return of this portfolio is 23%. But if you adjust the return for inflation — the real return, in economists' lingo — it's a negative number: minus 2.4%. The purchasing power of the original $7,000 has actually shrunken to $6,829.

So where did our investor go wrong? His picks were familiar names among the giants of the S&P 500. And therein lies a clue. Even though the portfolio included several sectors (financials, industrials, health care, consumer staples, technology, and telecommunications), it still lacked diversification. Entirely missing were small-cap stocks, REITs, and international equities. Since the Millionaire series debut, the Vanguard Total International Stock Fund (VGTSX) has gained 46.2%, and the Vanguard REIT Index (VGSIX) 123.2% — and that's after adjusting for inflation!

There are two lessons here. First, you should never be satisfied with just breaking even, because after inflation, you're usually losing money. Second, a diversified portfolio is essential to preserving the purchasing power of your retirement nest egg. Only with a portfolio that encompasses a wide range of assets can you expect to see real growth in your net worth.

If you're ready to get beyond the millionaire delusion and plan for a comfortable retirement, check out our Rule Your Retirement service. It's a complete source for planning advice with an ongoing focus on asset allocation. 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. Try Rule Your Retirement free for 30 days.