There is no shortage of online material claiming that anyone can become a Millionaire. All it takes is hard work, perseverance, discipline and some long term planning. While all those attributes are largely true, the big elephant in the room is often income.
Short of an inheritance, a big break on real estate or some lucky life changing stock pick, income plays an integral role in anyone’s goal of achieving Millionaire status.
In this post, I’ll attempt to analyze the optimal Gross Household Income necessary to achieve the ever-elusive Millionaire status over a more traditional working period. I won’t be discussing early retirement, alternative investing schemes, or extreme frugality. The star of this post is good old ordinary income!
Some Basic Assumptions…
Let’s first lay out some ground rules for the analysis. As anyone who’s written about subjects like these can attest, any future planning scenarios involve lots of assumptions. Some of which can greatly skew conclusions. Here are the assumptions I used in my scenario. I’ve attempted to keep things as simple as possible, while also maintaining a slight degree of realism.
1) Working Period: I assume that the total working period to achieve Millionaire status will be 50 years. This means starting to earn at 20, and retiring at 70.
2) Inflation: I assume an overall average inflation over the period of 2%. I recognize this is lower than the historical average of 3.18%.
3) Interest Rates: I used a relatively aggressive interest rate of 7%, which progressively reduces to 3% by retirement age. On average during the entire period, this works out to roughly a 5% return. If you feel this is too low, keep in mind that I also kept inflation fairly muted.
4) Cost of living: I used the average cost of living figures for various households from an online calculator that aggregates data from The Economic Policy Institute, United States Department of Labor, BLS, and American Community Survey.
5) Income Taxes: I only used Federal Income Taxes including Social Security and Medicare, but excluded any State Income Taxes due to the wide variation.
All the above assumptions mean the conclusions will be general in nature, so keep that in mind as you read the rest of this post.
Millionaire Status Definition
I’m talking about at least $1 Million dollars in today’s money by the time a worker reaches retirement age (70). To run the analysis, I would need to calculate what that Million dollars would look like 50 years from now to hold the same purchasing power. Inflation assumptions can have a drastic impact on this value.
Here’s what it would look like using a 2% inflation rate:
You can see that $1 Million Dollars becomes $2.7 Millions dollars over 50 years. So a 20 year old today, would need to have $2.7 Million by the time they retire to claim the relative equivalent $1 Million status of today’s 70-year-old retiree.
In case you were wondering, if we used the historical inflation rate of 3.18%, that number quickly grows to $4.8 Million dollars. Inflation is a pretty terrifying phenomenon!
We’ll stick with the goal of $2.7 Million for now and hope that inflation remains tame.
Saving Amount Needed to Achieve Millionaire Status
Next I calculated how much money would need to be saved and invested each year to achieve the $2.7 Million dollar target.
To come up with a number, I had to make assumptions on interest rates from the invested savings. I used the following logic, with earlier years being more aggressive:
1st Decade: 7% – Aggressive
2nd Decade: 6% – Aggressive
3rd Decade: 5% – Moderate
4th Decade: 4% – Moderate
5th Decade: 3% – Conservative
Using the interest rates above, a household would need to save $25,000 each year to achieve the target of $2.7 Million figure by the Age of 70.
Here’s a table that breaks down the growth of those savings by decade.
Average Household Expenses
Next we need to address what the basic expenses are for an average U.S. household. I used the online calculator mentioned earlier to determine the following:
Single Household / No Kids: $28,458 Per Year
Married Household / No Kids: $39,649 Per Year
Married Household / Two Kids: $65,597 Per Year
To try and keep things simple but still realistic, I averaged the above costs over a 50-year period as follows:
1st Decade: Single Household / No Kids
2nd Decade: Married Household / No Kids
3rd Decade: Married Household / Two Kids
4th Decade: Married Household / Two Kids
5h Decade: Married Household / No Kids
The average household expenses over the entire 50-year period is roughly $48,000 per year in today’s money. That’s pretty close to my current silver package expense lifestyle.
How much Income is needed to become a Millionaire
We finally have all the pieces we need to come up with a target household income per year to achieve Millionaire status:
Average Household Expense of $48,000 + Total Household Savings of $25,000 = $73,000 Net Household Income
We need to factor in Taxes somehow, so I’ll be using an effective tax rate of 18% for the entire 50-year period, which gets me close enough.
The Gross Income needed ends up being approximately $90,000 per year for the household described above.
The following table summarizes the Income by decade:
It would take a Household making on average $90,000 in Total Gross Income (in today’s money) to achieve Millionaire Status over the 50-Year period.
That Household would need to save about 34% of their Net Income to maintain the necessary savings rate.
Assuming a 3% rate of return at the 70-year retirement age, the achieved target of $2.7M would yield $81,000 in Income.
If the Household is assumed to begin retirement at a $40,000 Expense budget (in today’s money), we can use the same Inflation rate of 2% from the Analysis to estimate their future inflated expense level after 50 years to be $108,000.
The common advice is that you need approximately 80% of your pre-retirement income after you retire. The Household in this example would then need $86,000 per year in retirement to live comfortably.
Based on the above the example Household would be able to retire with only a slight shortfall, which would likely be covered by some type of social program such as social security.
The Importance of Income
Only 35% of US Households make $75,000 or above in Gross Income. This means that the remaining 65% of households do not make the $90,000 household income threshold in this analysis to reach Millionaire status.
The lucky 35% or so who do make the Income threshold would need to be disciplined about saving to achieve the milestone.
It’s no wonder so many people reach retirement age with a significantly underfunded savings target.
There’s no way for a household making minimum wage their entire working life to retire comfortably, that’s essentially the big elephant in the room when it comes to retirement advice.
Anyone in their early 20s today with a desire to retire comfortably must put a focus on their income, and aggressively pursue a well-paid trade, or a degree, which will pay the income level needed to extract at least $25,000 in savings per year.
As I mentioned at the beginning of this post, there are many factors and assumptions that can impact this analysis. The main point being made in this post is that you shouldn’t underestimate the importance of income when it comes to your finances. Find ways to increase your top line by pursuing a high paying career or trade, starting a blog for side income, and/or taking on multiple jobs. If that's difficult, then you'll need to reduce expenses, and eliminate debt to overcome the shortfall. Pay yourself first, and you’ll be well under way to reaching that target. And don’t forget to enjoy life along the way!
Readers, how much income do you think it takes to become a Millionaire by retirement age? Are you concerned about the number of households that are not prepared for retirement?