Becoming a millionaire used to mean you were on top of the world. Nowadays, it means you are climbing up the ladder. While a million dollars is completely out of reach for many people, it's just a step along the way for many others. Why? Because it doesn't go as far as it used to.

The term millionaire has been synonymous with being rich ever since we became a country. The person most often credited to be the first American millionaire, Elias Hasket Derby, made his fortune as a privateer during the American revolution. Back then a millionaire did really mean rich.

Also, we all love round numbers. We love to see 1999 become 2000, and our odometer roll over to 100,000 miles. So it's only natural we would fixate on $1,000,000. It's a milestone with a lot of zeros. It's even got an additional comma. Now that's rich – having two commas in your net worth! But what does that get you? Not as much as you would think. (Learn more in Retiring: Is $1 Million Enough?)

Housing
Housing is where most people hold their largest chunk of wealth and with real estate falling considerably in many areas, some might think that the lifestyle a million dollars would provide would be luxurious. But that depends on where you live.


There are plenty of nice places to live that don't cost very much, but according to the California Association of Realtors, the median house price in Palo Alto, Los Altos, Manhattan Beach and Cupertino is over $1 million. The median price for the entire San Francisco Bay Area tops $500,000 and Orange County is right behind at just under that. And those are just averages, not even something special. While other areas of the country aren't nearly this expensive, being a millionaire in some areas just means you paid off the mortgage.

Retirement
Another aspect of becoming a millionaire is not working. If you had a $1 million right now, could you retire and would your money last? This is a simple calculation. If you want to try to live off the interest and you invest the money in tax exempt municipal bonds that pay 4%, then you would have $40,000 a year to live on. (Learn more in What's The Minimum I Need To Retire?)

But that doesn't account for inflation going forward. If $1 million today doesn't feel like much, imagine what it will feel like in 30 years. At 3% inflation compounding for the next 30 years, $1 million dollars will have the purchasing power of $412,000 today and your $40,000 income will feel like $16,500. So retiring when you have $1 million may sound nice, but it's likely that it won't be what many people have in mind when they think of retiring a millionaire.

Instead of living on the interest, you could tap into the principal as well. Those are slightly more difficult calculations. For example, if you were 50 years old right now and wanted to plan for your money to last until you were 95, then you need money for 45 years in retirement. If you stick with the 4% return, then you could withdraw about $48,000 a year. Again this doesn't account for inflation going forward. Each year if prices rise, your standard of living would fall. In this example, you have 45 years of prices going up at 3%. So that last year will feel like $12,600 does today.

Combining Retirement and Real Estate
If we factor in a house, this gets even worse. If we take the price for a house out of the $1 million, even in a reasonable area and not San Francisco, it's going to be a big piece of your net worth and cut into your funds for retirement. For example, if you bought a nice $250,000 home, you would only have $750,000 left to live on. At 4% that would be $30,000 a year or $2,500 a month. That's before inflation takes a bit every year.


These retirement calculations show that even if your house is paid off, that living off a million dollars isn't what it's cracked up to be. And if your house isn't paid off, it's probably not even close to what you want to do.

Bottom Line
So the bad news is that even if you fall into a million dollars, you probably aren't set for life, especially if you are young. But the good news is, you'll still be a millionaire, and that's better than the alternative. (Learn how to make it happen, read 10 Steps To Retire A Millionaire.)

Related Articles
  1. Retirement

    Early Out: A Realistic Plan to Retire Younger

    If you want to retire ahead of schedule, it'll take some extra planning.
  2. Investing

    7 Creative Ways to Save for an Early Retirement

    Take note of these out of the box steps you can take towards securing yourself an earlier, more comfortable retirement.
  3. Your Clients

    Top Tips to Transition into Retirement Confidently

    Here are some of the best ways to make the transition to retirement painless.
  4. Investing Basics

    4 Assumptions That Can Hurt Your Retirement

    Retirement planning is a must, but having a plan that's filled with old and dated assumptions can cause great harm.
  5. Economics

    Obama’s Final Gesture to Expand Retirement

    President Obama has announced that the 2017 congressional budget will feature an attempt to expand access to qualified retirement savings accounts for workers.
  6. Philanthropy

    How Billionaires Around the Globe Give Back

    This list of foreign billionaire philanthropists is robust. Here's a list of rich entrepreneurs around the globe who have given back in really big ways.
  7. Saving and Spending

    Managing Housing Costs During Retirement

    Keeping your home in retirement could pose financial restrictions you may not have considered. Explore options and keep more of your retirement nest egg.
  8. Retirement

    The 4 Best Countries for Retiring in Asia

    Whether you're looking to hang out with your fellow expats, or immerse yourself in the local culture, Asia has much to offer retirees.
  9. Products and Investments

    An Annuity Lowdown for Investors and Advisors

    Knowing how annuities work starts with an explanation of what each part is. Here is a list of terms that cover the basic aspects of annuities.
  10. Saving and Spending

    When You Should File Early for Social Security

    Filing early for Social Security can make sense. Here's a list of when it's appropriate to ignore the conventional wisdom of waiting as long as you can.
RELATED FAQS
  1. How soon should I start saving for retirement?

    The best answer to the question, "How soon should I start saving for retirement?", is probably, "yesterday," and the second ... Read Full Answer >>
  2. How are spousal benefits calculated for Social Security?

    The amount of your Social Security spousal benefit depends on a number of factors, including your age, the maximum amount ... Read Full Answer >>
  3. Are Social Security benefits adjusted for inflation?

    Social Security benefits are adjusted for inflation. This adjustment is known as the cost of living adjustment (COLA). For ... Read Full Answer >>
  4. How much can I contribute to my Roth 401(k)?

    The maximum amount that a person can contribute to his Roth 401(k) for the calendar year 2015 is $18,000, or $24,000 for ... Read Full Answer >>
  5. Under what circumstances would I benefit from a high net worth insurance policy?

    A high-net-worth insurance policy is specifically tailored to suit the needs of high-net-worth individuals. It is specifically ... Read Full Answer >>
  6. Under what circumstances would I require private wealth management?

    An investor who is a high-net-worth individual (HNWI) may require private wealth management services. HNWIs have unique financial ... Read Full Answer >>
Trading Center