It used to be that people aspired to become millionaires. One million dollars was regarded as the pinnacle of financial success. Whole books were written on the subject. And, the only argument was whether you should get there quickly (Rich Dad, Poor Dad) or slowly (The Millionaire Next Door).
Now, it’s actually easy to become a millionaire! Easy, if you don’t mind 40 years of honest, hard work and if you practice basic financial common sense. If so, the chances are excellent that you, too, will hit that magic $1 million mark by the time you retire. For example, if you start off earning $25,000 and work for 40 years (earning around $80k in your last pre-retirement year), and save just 10% of your annual salary (returning 8% p.a. on your invested savings), you will have exactly $1,000,000.
The problem is in surviving as a retired millionaire. You see, in 40 years time, when you retire, you will be used to living on $72,000 p.a. ($80k less 10% for savings), and $1m will ‘safely’ (at a 4% withdrawal rate) give you only half of that to live off. And, you can halve that twice again to allow for 40 years of inflation, so you will really be retiring on the equivalent of just $10,000 a year in today’s purchasing power. Time – and inflation – is your enemy: the longer you take to reach your million dollars, the less it is worth in spending power.
So, aiming for $1 million over a full, 40-year working life (starting now) is no longer a reasonable financial target.
This gives you two options: aim for more money in retirement, or aim to get your million dollars sooner. If you still start by earning $25k p.a. but are prepared to live off just half of that you will be able to save $1 million in 24 years time. If you then keep working for a further 16 years, still saving 50% of each paycheck, you will be able to retire with more than $4 million in the bank after 40 years, enough to fund a $37,500 p.a. lifestyle (in today’s dollars) throughout your retirement.
But, if halving your standard of living so that you can save a full 50% of your weekly pay packet for 40 years doesn’t sound like a reasonable option for you then you need to aim for Plan B, which is to increase your income and learn how to invest.
Aside from demanding pay increases and promotions, there are lots of ways that you could increase your income. For example, you could start a part-time business.
My son started an online business from his bedroom when he was 12 years old. He cut his teeth selling toys on eBay before setting up his own website, and had over $200,000 in his bank account before he graduated high school just 5 years later.
If you could add that $200,000 to your own savings (say, after 5 years of running your own part-time business) then you would have nearly $4,000,000 in the bank after 40 years, even if you continued saving just 10% of your $25,000 salary.
Perhaps starting a business is difficult. Perhaps you will fail. But, it seems easier to me than trying to save half your paycheck for the rest of a very long working life, or trying to survive in retirement on just $10,000 a year.
Adrian J Cartwood is a self-made (and, recent-retired) multi-millionaire and author of the personal finance blog “How To Make $7 million In 7 Years“ where AJC blogs about his personal journey from $30,000 in debt to $7 million in the bank. AJC (in conjunction with popular blogger and author, Debbie Dragon) has just published his first book, “Share Your Number“!