On a recent guest feature, we were asked, “can someone really save $1,000,000 on an average salary?” The simple answer: Yes.
Is it easy? No. It’s complicated.
There is a big gap between difficult and impossible, or in this case, improbable and impossible. Some variation of, “How do I make more money?” is one of our most frequent questions, and it’s a great question to ask. Unfortunately, there isn’t an easy answer. Further, some people are asking “How do I make more money?” because they really mean, “How do I get rich?”
Two out of 3 people haven’t created a budget (even though it only takes 15 minutes), but they still assume they have an income shortage rather than a spending surplus (if you’re curious how the Average American spends their money, click here). They’re not completely wrong.
When you have more money, it is easier to save more money. According to Investopedia, on average, the top 1% have $1 million or more saved for retirement, while 1 in 3 Americans have $0 saved. But, if you have a spending surplus, it won’t matter if you make $30,000 or $300,000 if the only difference is whether you spend it on $30,000 worth of toys or $300,000 worth of toys. Further, cost of living varies widely across the U.S., which might explain why 1 in 4 families making $150,000 or more still live paycheck to paycheck.
How Do I Turn $30,622 into $1,000,000?
I promised to look into this question for @PayBalances followers after Jean Chatzky sent the following Tweet:
Here's how much you need to save each month to reach 1x your annual income by age 30. Click To Tweet
What unfolded in response is typical for Twitter but might be confusing for the casual observer, or non-Twitter user. Predictably, a few things occurred:
- Jean (Mrs. Chatzky? We’re not on a first-name basis but bear with me here) is a personal finance author, Financial Editor of NBC and the Today Show, and has been talking about money longer than some of the people who reacted to her Tweet have been alive.
- This is not the first time Jean has Tweeted this recommendation. Even the most cursory Twitter-search would show she has said this quote at least three or four times before with minimal blowback. But, Twitter is a weird, lawless land. The reaction and response to a Tweet is as much related to the content of the Tweet as it is to the time of day it’s released; how collectively bored Twitter is that day; and who on your TL with significant influence Re-Tweets you. In other words, Twitter had time this day, so this Tweet – containing the exact same information as previous Tweets – sent people into several levels of the feels.
Twitter is not a place for facts. In fact, The Twitter Rules – a make-believe doctrine that guides how users interact on Twitter, updated daily but rarely cited by Twitter Users — dictate that if you have a significant number of followers, then you are a qualified expert on every topic. When in doubt or proven wrong, simply cite The Twitter Golden Rule: Jokes > Facts.
If you remember the rules your time on Twitter will be filled with serenity rather than its second cousin, insanity.
With this in mind, here is a non-exhaustive disclaimer of the topics that I will not cover in this post as they relate to people’s ability or inability to save for retirement. Please note that I put this list here in a futile effort to maintain my own Twitter-serenity because undoubtedly someone will see the headline of this post, not read it, and will still REACT with their own uninformed opinion on the presumed contents of the post they never bothered to read (another Twitter rule). I only pray this person has fewer followers than me.
- Why Millennials are facing the scariest financial future of any generation since the Great Depression
- The impact stagnant wages have had on past performance is having on current performance or will have on the future performance of retirement savings
- Generational Wealth, Wealth Transfer, Poverty Immobility, or Wealth Mobility in the U.S. (or lack thereof)
- Inflation, Taxes, Politics, or honestly, most any other opinion or topic I don’t feel like discussing today
- Millennials (sorry)
While you are welcome to discuss the above, or any related topic in the comments below, the only two questions I am attempting to answer are:
- Can you really save $1,000,000 on an average income?
- On an average income, was it reasonable for Jean to suggest: “By the time you’re 30, aim to have 1x your annual income set aside for retirement. At 40, 3x; at 50, 6x; at 60, 8x; and by retirement, 10x.”
What is the “Average” Income?
According to the federal government’s U.S. Bureau of Labor Statistics 2015 consumer survey, the “average income” was $69,629 in 2015. However, you don’t have to be a mathematician or a Millennial to know this average is skewed by both high and low wage earners. For our purposes, let’s use the median wage (50% earn more and 50% earn less):In 2015, the average household income was $69,629. The median household income was $56,516. The median income for a single person was $30,622 Click To Tweet
Median Income (2015 numbers):
- Household Income (overall): $56,516
- Asian: $77,166
- White (not Hispanic): $62,950
- Hispanic (any race): $45,148
- Black: $36,898
- Single Person (overall): $30,622
Net Worth (2013 numbers):
- White: $132,000
- Asian: $112,000
- Hispanic: $13,000
- Black: $9,000
This post will use the Single Person’s Median Income of $30,622. You can use the information above and the calculators below to tailor to your own financial independence retirement number.
How Do I Save $1,000,000 Before Retirement?
Here is a simplified table from Motley Fool (assumes 7% return and a retirement age of 63).
If you don’t fit neatly into the above scenarios, I like the free calculators available at Investor.gov. They are straightforward and easy to use (We’ve partnered with NerdWallet for all your personal finance needs at PaychecksAndBalances.com/Tools). How much would our hypothetical Single Person need to save each month assuming an average return of 4, 7, and 10% and a retirement age of 67?Starting at age 25, saving $442/mo ($15/day) lets you retire a millionaire. After 35, it jumps to over $900/mo. Click To Tweet
Based on the recommendation in Jean’s original Tweet, this individual should save 1x their income by age 30. Therefore, we’ll assume they start working at age 20 to give them a reasonable chance of making some investment contributions prior to age 30. If they began at age 20, they would have 47-years to contribute towards retirement in our scenario (age 67).
Assumptions #1: Average return of 7% per year with savings goal of $1,000,000 by age 67
Assumptions #2: Average Return with +/-3% variance on $253/monthly ($8/day) savings by age 67
- 10% Average Return: $2,648,676 (value at age 67)
- 7% Average Return: $1,000,000
- 4% Average Return: $403,830
The person who believes they will succeed focuses on the steps necessary to achieve their goals. The person who believes they will fail focuses on the risks of missing their goals. So, the person who thinks they can and the person who thinks they can’t are both right. Let’s revisit our original questions:
- Can you really save $1,000,000 on an average income?
Starting at age 20, if you saved at least $253/month ($8/day) and your portfolio averaged modest returns of 7% over 47-years (this is not unreasonable) you would reach $1 million. $253/month is only 10% of our annual Single Person’s Median Income of $30,622 – and this assumes they never receive a raise or promotion in their entire life. $253/month is about 5% of our Household’s Median Income of $56,516.
In fact, if you averaged returns of 10% this exact same monthly contribution would gross over $2.6 million (before taxes). You could also adjust your monthly contributions upwards for: company matches, raises or promotions; any significant market downturns; or for each year you delay investing or withdrawing.
Stated another way, if an individual making the median salary is willing to live on 90-percent of their income, they can meet Jean’s recommendation and retire a millionaire. If the average household lived on 90% of their income, they would retire with well over $2 million. If you want to know the exact year you’ll be a millionaire, there is a calculator for that too. Living on 90% isn’t easy given that just 3-categories (Home; Transportation; and Food) account for over 50% of the average’s household’s expenses. But, as stated in the beginning, difficult is not the same as impossible and improbable is not the same as impossible.
- On an average income, is it reasonable to suggest: “By the time you’re 30, aim to have 1x your annual income set aside for retirement. At 40, 3x; at 50, 6x; at 60, 8x; and by retirement, 10x.”
Answer: For Jean to be wrong, our Median Income Single Person would need to contribute less than $253/month towards their retirement themselves or in combination with an employer match, if available, or have an average return of less than 4%. At 30, 40, 50, and 60, their estimated retirement savings would look like the following:
As with most conundrums, our answers have only led to more questions… If you’re a 20-something, you’re probably wondering where you can save an extra $253/month or $8/day (Hint: Start with your employer or read our review of The Automatic Millionaire). If you’re a 30-something, you might be wondering why I wrote this depressing post. Ignorance is not bliss; ignorance is ignorance.
You’re not in this alone. If you’re ready to change your current path, just 15-minutes can change the next 15 years and if you have follow-up questions, AskPB. We’ll continue to find the answers to raise your Paychecks and lower your Balances.
References Mentioned in this Post
- U.S. Bureau of Labor Statistics – Average Income 2014-2016
- U.S. Real Median Personal Income by Year 1974 – 2016
- U.S. Census Bureau Releases Wealth and Asset Ownership
- U.S. Census Bureau – Income and Poverty Visualizations
- How the Average U.S. Consumer Spends Their Paycheck 2010-2016
- Investor.gov – Compound Interest and Savings Goal Calculators
- CNNMoney: Millionaire Calculator
- CBS News CBSN: Your Money Matters ft. Paychecks And Balances
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