# Doing a Lot with a Little

Millionaires make tons of money. Right? They must. Otherwise, how would they have reached such heights? Well…

According to data from Thomas Stanley, co-author of “The Millionaire Next Door” (amongst other things), the typical millionaire’s annual income is just 8.2% of their total wealth.

These data are backed up by a Treasury Department analysis that found that married millionaires under the age of 70 have an averaged of \$8.45 in income per \$100 of wealth. This works out to 8.45%, almost exactly what Stanley estimated.

Said another way, the typical millionaire has a net worth that’s roughly 12x their income. So those with \$1.2M in the proverbial bank typically make around \$100k. Probably not as much as you would have thought.

Of course, this isn’t to say that being a millionaire on \$100k is a common thing. But says more about a general lack of discipline as opposed to any sort of hard mathematical limitations.

Consider the following…

If you’re fresh out of college and start a new job today at \$35, 000/year and receive 3% annual bonuses, you’ll be earning just a shade under \$100k/yr in 35 years. That’s without any sort of major promotions, moves to a new job for more money, etc. In other words, it’s a pretty conservative scenario.

If, during that time, you set aside 15% of your income in a retirement account and earn 8% returns, you’ll be sitting on just shy of \$1.4M at age 57* — a nest egg that’s nearly 14x your income.

Note: Coincidentally, Stanley states that the typical millionaire next door is 57 years old…

If you instead save just 10% of your income and hold everything else constant, you’ll have roughly \$915k, which works out to a little over 9x your income.

And finally, if you further reduce your savings rate to 5%, your nest egg will shrink to just under \$460k, or just 4.6x your income.

Yes, I realize that these calculations are all being done in nominal terms and that the value of a dollar will be significantly less in thirty years, but the larger point still stands.

Small changes in your behavior, when maintained over a sufficiently long period of time, can have a huge impact on your financial well being. And it really is possible to do a lot with a little (relatively speaking).

If your employer matches at least a portion of your retirement contributions, your nest egg will grow even further, faster. Or you’ll be able to make the same progress with less in the way of contributions.

Oh, and I also ignored things like home equity, which will further increase your net worth.

### 5 Responses to “Doing a Lot with a Little”

1. I started with 5% of my salary for retirement, and that initially really hurt but I got used to it as I kept growing into my cost of living raises and earned promotions. But after a few years I got smarter and when I got a raise, kept most and put some, say 1 or 2% towards retirement. I’ve done that a number of times and got to greater than 15%, despite making a bunch of other stupid financial mistakes and wallowing in debt before getting my act more focused. Took years, but I’m there with minimal direct impact to my life since I never grew into needing that money I’m not really missing it.

Additionally, small, almost harmless amounts that you grow can add up over time. Say you start a college fund for your new arrival with just \$20 a paycheck and you’re paid biweekly. That’s \$520 year one. Junior might afford a used freshman textbook with that, but he’s only one year old, you’ve got some time. But it looks to small so you tack on \$10 more a pay for the next year, so you end up with \$1300 (\$520+\$780) end of year 2. You didn’t really miss that \$10 a pay. Now you get a raise, \$100 a pay, so you bump it up another \$20 a paycheck and keep \$80 for the family, and so on adding some year by year. By the time the child is ready for college, you’ve got \$150 a paycheck, or \$3900 a year, flowing into the college fund. Maybe you’ve only got \$25K total there, but you’re already used to living without the \$3900, so that’s another \$15,000 over the four years they’re in college. That’s \$40,000 total. Will that pay for everything? Maybe, maybe not, depends on scholarships, grants, etc. But will it help? It will more than likely pay for two years of community college and two years at a state school (especially if they commute to the state college) and if nothing else, that should cover your share of helping them out. This is pretty much how I’m helping my kids, and it all started with nothing but \$20 a paycheck and upping the amount over the years.

2. Thanks Nickel.

I often share an illustration that shows a year by year balance of \$10K invested in the S & P 500 Index and \$10K invested in an indexed annuity rider with a guaranteed return of 6% over the last 10 years.

The ‘lifetime income annuity rider’ has a return that is 30% greater. For clients within 10 to 15 years of retirement, it seems a better vehicle to build and protect a nest egg…while I also agree that for clients with 20 or years more before retirement the average return of 8% is worth consideration.

I prefer the true compounding of indexed annuity product than the market ups and downs that average 8% but far little actual gain.

Anyways, I am an avid reader of your column and you do a very fine job. Thanks.

3. Marvin: Right. The market has returned just shy of 8% for the past 20 years. And it’s dead easy to earn earn market minus 0.1% — just buy a broad market index fund. This isn’t to say that past performance predicts future performance, but just because people choose to undermine themselves (this is really what the DALBAR study shows) doesn’t mean that it’s unrealistic to (nearly) mirror the market.

4. The continued use of Wall Street’s proposition of 8% annual returns hurts the average consumer.

Dalbar’s Quantitative Analysis of Investor Behavior published every year shows that the average consumer earns roughly 3% to 3.5% in the market while the market has averaged 8% over the past 20 years.

It is important that those of us in the financial world begin to use illustrations consistent with the actual experience of average consumers.

5. This far overstates how much can be done. The larger point does not stand when you factor in inflation and a less cavalier investment return expectation (8%? Are you kidding? Nobody suggests that return anymore, regardless of market past performance).

If we assume 5% annual return and 3% inflation, then the actual amount saved at age 57 in your scenario (\$35,000 at age 22, 15% saved, 3% raises each year) is…

\$427,335.80, not \$1.4 mil,

and that’s in PRE-TAX dollars, so maybe more like \$300,000 after tax (varies depending on assumptions about withdrawal rates and future tax brackets).

So, yes, millionaires need to make a good deal more money than \$35,000 a year (or save a good deal more than 15% of it).