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