Being rich can mean different things to different people in 2 ways – people might consider non-financial attributes (health, friends, family) to be a part of their ‘feeling of richness’ and secondly people might find the same dollars of net-worth as rich as well as poor. If Warren Buffet’s net worth becomes $10 Million, he perhaps will consider himself poor.
For purposes of this post, we will take 1 Million to be the ‘bench mark’ – in other words, we will examine how easy or difficult it is for an average Joe to amass the net worth of 1 Million till retirement.
Let us examine this table for a minute. It has 6 rows: 1- Starting Age, 2- Retirement Age, 3- Income, 4- Savings rate, 5- Return on Investment, and 6- Net worth at retirement. And it has 5 scenarios: The only difference from Scenario-2 through Scenario-5 is the ‘Starting Age’ (highlighted in Red box) when you start to save and invest. The only difference between Scenario-1 and Scenario-2 is the “Return on Investment”.
Now let me read out the Scenario-1, it reads as follows – anyone who starts to save at the age of 20, earns $40,000 a year, saves 30% of what they earn, invest and earn a 2.6% return on investment would have $1 Million at their retirement age of 65. So, achieving a net worth of $1 Million is not as difficult for many in the middle class.
“Net worth at retirement” is a calculation taking the first 5 rows as inputs. Let us look at the impact of the first 5 rows on “Net worth at retirement”. Starting Age – the sooner you start saving, the more you will have (compounding). Retirement Age – the longer you work, the more you will have. Income – the more you earn, the more you will have. Savings rate – the more you save, the more you will have. Return on Investment – the more disciplined you are in your investing habits, the more you will have.
I used Scenario-1 only to gauge how easy or difficult it is for someone to amass $1 Million. In reality, Scenario-2 is more realistic. It still expects you to work continuously from 20 till 65, still expects you to have a steady income of $40,000 through out, still expects you to save 30% of your income, BUT estimates your earnings on investment to be 8% (a more realistic estimate based on historical data). In Scenario-2, you have $4.6 Million at retirement.
Like mentioned above, each of the first 5 rows has an impact on the ‘Net worth’, I developed Scenarios 3 through 5 to illustrate the impact of changing row 1 values (Scenario-2 has Starting Age of 20, Scenario-3 has Starting Age of 30, Scenario-4 has Starting Age of 40, and Scenario-5 has Starting Age of 50). The changing ‘Starting Age’ is highlighted in a Red box.
Other things remaining the same, you end up with $4.6 Million if you start at 20, $2.0 Million if you start at 30, and less than $1 Million if you start at 40 or 50.
So START INVESTING EARLY…… Read here How Net worth calculations vary with changes in Retirement Age