Becoming a millionaire

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.

Achieving 1 Million

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

Download the Excel file to play with numbers