Importance of saving $ gets bigger

"One dollar equals $5. It's an easy rule of thumb."
That, anyway, was the claim made in October 1999 by an always-accurate personal finance columnist I know.
OK, it was me.
The rule of thumb came in one of those finger-wagging columns about the virtues of thrift. Before you spend $1 on a can of Coke, I said, think about what that dollar could be worth if it were invested for 20 years instead.
Indeed, the price of anything -- lunch, a car, the late fee on a video rental -- could be multiplied by five to get the real cost. And that would make it a lot easier to control your craving for things that aren't worth it.
I selected an investment return averaging 8.38 percent a year. It was somewhat arbitrary, picked to turn $1 into a neat $5 instead of $4.26 or something else hard to remember.
But back then, assuming an 8.38 percent return seemed quite reasonable, even modest. Stocks actually returned more than 10 percent a year in the 20th century -- and they averaged about 18 percent a year in the 1990s.
But things have changed a lot since that happy October, which seems an investing lifetime ago. So I thought I'd revisit the topic, update the numbers and re-examine the thesis.
Rather than gaining 8.38 percent a year, stocks, represented by the Standard & amp; Poor's 500 index, have lost 12.5 percent a year since 1999. So that $1 put into the average stock is now worth only 64 cents.
Most investors probably have come to grips with the idea that double-digit returns are a thing of the past. No one knows what the future holds, but most financial planners appear to be assuming annual returns will average 6 percent or 7 percent over the next decade.
Here's the situation
To be on the safe side, let's assume 5 percent over the next 20 years and take anything more as gravy. What's that do to my $1-is-$5 rule of thumb?
Blows it to pieces!
Turns out one dollar wouldn't be worth $5, but only $2.65.
Back in 1999, I noted that sticklers for precision would factor in inflation and taxes on investment gains, knocking the $5 down to $3. Still, most people would balk if they thought a $1 soda really cost $3.
That was a rough number assuming 2 percent annual inflation and a 20 percent capital gains tax on the $4 profit realized when $1 grew to $5.
Using those same assumptions today, our $1 invested at 5 percent doesn't even end up as $2.65 -- it's a paltry $1.56. In other words, invest $1 today at a 5 percent annual return and in 20 years you'll be able to buy what $1.56 buys today.
That's not much to show for 20 years of self-denial and risk-taking.
Is there less reason, then, to skimp and save than there was back at the end of the '90s?
Obviously, the opposite is true. If you can't assume investment returns will produce a big nest egg, the only other way to get there is to save more.
Some what-if's
If you want to accumulate the inflation-adjusted equivalent of $500,000 over 20 years, you'd have to save about $15,500 every year if the annual return were 8.38 percent.
Cut the return to 5 percent, and you'd have to save $22,500 every year.
So the second point the 1999 column made is still valid: Look at every expenditure and judge how much real value you get for the money, whether that be monetary value, pleasure, happiness ... whatever's important to you.
Back then, I argued that, for me, there was insufficient pleasure to justify spending $30,000 for a car instead of $20,000.
The extra $10,000 wasn't worth it when I figured the real cost was $50,000 over 20 years.
And today? Well, that extra cost isn't $50,000, it's $26,500. That's still too much. Indeed, it's too much even if I use the inflation and tax adjustments to set the "real" cost at $15,600.
As you can tell, I'm in favor of saving, period.
In the '90s, the $1-is-$5 was a slick gimmick, a neat motivator.
Today, we don't need anything clever. The incentive to save is something much more elemental and easy to understand: fear.
Save now -- or hate yourself later.
XJeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at brownj@phillynews.com.