bigtex wrote: ↑Thu Nov 15, 2018 4:03 pm

Hello,

I am wondering how hard it is to become a millionaire on an income of less than $100k? Is millionaire status still achievable by 50? by 40? At some point, expenses can't be reduced any further. At what point does income have to rise substantially in order to reach early financial independence goals? If all these investment calculators show that becoming a millionaire is attainable regardless of income, why do so few people ever reach a million dollar net worth? Do children usually end up more or less wealthy than their parents? Or is parent wealth compared to children not related?

There's no reason to target one million dollar specifically.

Let's pick a family with two earners making $31,000 each, for a household income of $62,000. That's the approximate US median household income.

In their 20s, they pay down debt, accumulate a down payment, and buy a modest house at the end of their 20s with a 30-year mortgage. They don't start saving and investing before the age of 30. Then, they work, live below their means, save, and invest from age 30 to 64. At age 65, they retire. Each would qualify for a annual $15,500 Social Security pension at age 66, but they decide that one of them will claim at age 65 and get $14,000 and the other will delay until 70 to get $20,000.

We'll assume, for simplicity, that their expenses are relatively level all along. Their mortgage is modest, and once it's paid, an equivalent HELOC is used to spread the cost of maintenance (kitchen remodel, roof, etc.).

How much should they save to retire with dignity? I'll use a similar calculation to what I've shown in the post

The Mathematics of Retirement Investing.

One of the spouses likes aggressive investing, but the other is risk averse. They compromise to holding a 50/50 stocks/bonds portfolio (with stocks subdivided between domestic and international, and bonds subdivided between nominal and inflation-indexed) all life long, during both work years and retirement. They know that market returns fluctuate, but, for planning purpose, they use a

*real* 3.5% growth trend for such a balanced portfolio.

To retire with dignity, they'll need to:

- Accumulate ($20,000 X 5) = $100,000 to fill the gap in Social Security payments from age 65 to 69.
- Save and invest enough in a tax-deferred accounts to equalize ($62,000 - savings) with ($14,000 + $20,000 + portfolio withdrawals).

At a real 3.5% growth rate, investing $1000 per year for 35 years, from age 30 to 64, would grow to a total of $66,674 at age 65. Accumulating $100,000 requires $1,500 in annual savings and investing. At age 65 with a 50/50 portfolio, the

VPW table allows for a 4.8% withdrawal percentage. Multiplying $66,674 by 4.8% gives $3,200. In other words, each additional $1,000 in annual savings would project into portfolio withdrawals

*fluctuating* from $3,200 in retirement; that's 3.2 times the annual savings.

So we want to find the additional savings such that ($62,000 - $1,500 - additional savings) = ($14,000 + $20,000 + 3.2 X additional savings).

Code: Select all

```
S = additional savings
$62,000 - $1,500 - S = $14,000 + $20,000 + 3.2 S
$60,500 - S = $34,000 + 3.2 S
$60,500 - $34,000 = 3.2 S + S
$26,500 = 4.2 S
S = $26,500 / 4.2 = $6,310
```

So, the household must save

($1,500 + $6310) = $7,810 annually into a tax-deferred account, from 30 to 64, living on the equivalent of a

($62,000 - $7,810) = $54,190 pre-tax income to preserve a relatively similar (but fluctuating) standard of living in retirement. Such savings would grow toward a

($7,810 / $1,000 X $66,674) = $520,724 portfolio.

**This couple ***doesn't* need a million dollar portfolio to retire with dignity. It only needs approximately half as much in inflation-adjusted terms!
What the calculations above are suggesting is a

*dynamic* savings rate. It projects variable percentage withdrawals back into accumulation years. Similar to VPW, it requires annual calculations without taking the past into account. Let me illustrate this.

At age 30, starting with a $0 portfolio, according to the above calculations, they need to save $7,810 into a tax-deferred account.

That's a 12.6% savings rate.
Every year, they redo the above calculations based on their current portfolio balance and current income, using an updated investment horizon. At age 35, for example, maybe they've been unlucky and their portfolio has only grown to $37,500 (inflation-adjusted) . The household income is still $62,000. Let's do the calculations, keeping the constant real 3.5% portfolio growth trend but for a 30 year investment horizon from age 35 to 64.

In 30 years, $37,500 would grow to $105,255. This would cover the Social Security gap and allow for an additional (

$5,255 X 4.8%) = $252 VPW portfolio withdrawal. In 30 years, investing $1000 per year would grow to a total of $51,623 and allow for a

($51,623 X 4.8%) = $2,478 VPW withdrawal.

We want to find the additional savings such that ($62,000 - additional savings) = ($14,000 + $20,000 + $252 + 2.478 X additional savings).

Code: Select all

```
S = additional savings
$62,000 - S = $14,000 + $20,000 + $252 + 2.478 S
$62,000 - S = $34,252 + 2.478 S
$62,000 - $34,252 = 2.478 S + S
$27,748 = 3.478 S
S = $27,748 / 3.478 = $7,978
```

So, the household must save $7,978 at age 35 into a tax-deferred account, living on the equivalent of a

($62,000 - $7,978) = $54,022 pre-tax income.

That's a 12.9% savings rate.

See how the savings rate fluctuates according to market returns. Lower market returns leads to a slightly higher savings rate, naturally letting them buy slightly more investment assets when they're down. Higher market returns would lead to a slightly lower savings rate, naturally letting them buy slightly less investment assets when they're up. Maybe I should start a thread called Variable Savings Rate (VSR) as a prelude for Variable Percentage Withdrawal (VPW).

**Added:** I just started a new thread

The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW.

Bogleheads investment philosophy |
Lifelong Portfolio: 25% each of (domestic / international) stocks / domestic (nominal / inflation-indexed) long-term bonds |
VCN/VXC/VLB/ZRR