Is That iPad 2 Really Worth $2,000?

When someone asks me if I've changed my mind yet and now want one of Apple's new iPads, I tell them: "Well, even if I did, I probably wouldn't want to spend $2,000 on one."

They generally looked at me, baffled. "What do you mean, $2,000? I thought they started at $500."

But I figure $2,000 is the minimum that Steve Jobs's new toy is going to cost me.

How come?

Simple. If I don't spend that $500, I'll invest it.

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For our columnist, the real cost of this $500 iPad 2 is $2,000.

Historically, the stock market has produced average long-term returns of maybe 5% a year above inflation. (More on this below.)

At that rate, in 10 years' time my $500 will have grown to about $800. That's in today's dollars—after inflation. In 15 years it'll be about $1,000, and in 30 years, $2,000.

I figure I'll be retiring in about 30 years, which is when I'm going to need lots of capital. I can have the iPad now, or about $2,000 then.

Thanks, but I'll take the $2,000.

(If I were younger the iPad would cost me even more. If you're 30 or younger and you just bought one, congratulations: It probably cost you about $3,000.)

Yes, I typically do these mental calculations, at least in the back of my mind, for most things. A "$50" lunch at Morton's really costs $200. A "$5,000" trip to Bali: $20,000. And so on. It tends to cut down on the spending. I typically come back from the mall with no bags, gleefully clutching my future millions. (Warren Buffett, as Jason Zweig reminded us over the weekend, takes a similar view.)

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The real cost of a $5,000 vacation in Bali could be $20,000.

As you can imagine, I get some funny looks when I tell people how I think. But, oddly, a lot of people go further. They get defensive, or angry, or downright hostile. "Oh, that's just absolutely ridiculous," they say, glaring.

But is it?

I'd argue it's the conventional, "here and how" thinking about money that's ridiculous. And that the sticker price on each item—the "$500" iPad and so on—is grossly misleading.

It doesn't reflect the fundamental truth about our lives: We're short of capital.

Maybe not today, or this year or even this decade. But if you're like most people, you're going to have less money over the course of your life than you would like. The average 65-year-old is going to live another 20 years so after retiring, and many people will live for 30 or more.

So, one way or another, you are already rationing your capital across your lifespan, whether you realize it or not.

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The real cost of a $50 lunch at Morton's could be $200.

If you choose to spend a dollar today, you are actively choosing not to have four dollars, or six, or even eight later.

For someone age 40, each dollar you spend is actually costing you about $4. Even if you're in your mid-50s, each dollar you spend is actually taking about $2 out of your retirement fund.

And for somebody age 20, for whom the money can grow for at least 45 years, each dollar is actually costing you nine.

This is real.

I've had a lot of reader response after writing last week about the scary math of retirement.

Tens of millions of Americans have saved too little to retire in comfort. Just to provide an income of $1,000 a year in retirement, you'll probably need to save about $20,000. Someone who wants their savings to provide them with just $25,000 a year in retirement is going to need about half a million dollars, and you can do the math from there.