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The Chance to Save $1M

Saving one million dollars.  It’s the financial goal of many early retirement dreamers.  Since the FIRE movement lit up the blogosphere in the last decade, we’ve been showered with stories of average folks saving $1M or more.  It’s not that hard.  It doesn’t take that long (10-15 yrs).  If they can do it, so can you!


But is the goal of becoming financially independent truly accessible to most people, or we just seeing the results of a privileged few?  I decided to dive into some of the numbers to find out for myself how accessible financial independence really is across the income spectrum in the United States.  Here is what I found: how to save one million dollars.


How Common Is Financial Independence?

Financial independence is not a very common thing, even in the wealthiest countries.  It’s a bit difficult to define whether a household is financially independent, much less to find any data, so I’m going to focus on households with $1M net worth instead.   Certainly, someone can be financially independent with much less than $1M, but I’m going to use $1M net worth as the proxy for financial independence, just because.


In the United States, there are 8.8 million households with a net worth over $1M in 2016 (according to Wikipedia, citing a study from the Boston Consulting Group).  That’s  7% of all households in the U.S., according to census data.  That means 93% of all U.S. households have less than $1M net worth.  It is indeed pretty uncommon.


Becoming A Millionaire

So now that we know it is not very common to become a millionaire, how accessible is it?  Certainly, lots of millionaires are born into wealth, but many also are self-made. There are no official statistics on how many millionaires are self-made, but Thomas Stanley (author of Millionaire Next Doorclaims around 80 to 86% of millionaires in the United States are self-made.  Others claim it is lower, but the consensus seems to be that well more than half of U.S. millionaires are self-made.


Mr. Stanley made a name for himself arguing that average folks can indeed become millionaires.  But what do the numbers say? Is it all just hype?


The Math of Saving $1M Dollars

There are dozens of factors that go into becoming financially independent.  But the math of saving $1M dollars is relatively simple.  There are four important variables, in no particular order of importance:

  1. How much income you have
  2. Your savings rate
  3. The rates of return of your investments
  4. How much time you have


All four of these variables impact your path to financial independence.  As you may have guessed, it is easier to save $1M with an astronomical income than without one. But if your savings rate is low or you only have a couple of years to reach your goal, then even a high income probably won’t be enough.  To save $1M, you need to do well in at least two or three of the above variables.


You can be weak in one or two of these factors, but if you have enough juice from the others, you can still save $1M.  In other words, if you have little income, but lots of time and a healthy savings rate, then you can reach $1M.  Similarly, if you have a low savings rate, but high income and plenty of time, then you can also make it.


Fixing Investment Performance

To simplify things, I’m going to fix the third factor above – investment performance – as a constant.  I will assume everyone simply invests in the S&P 500 at the historic compound real rate of return of about 7.26% (after inflation) going back to 1923 when the S&P’s Composite Index was first created.


How to Save $1M Personal Savings Rate Impact on Saving $1M

Of course, that’s not a fair assumption.  Not everyone makes good investment choices in reality.  But, the right information about how to invest is out there, available, on the internet, for free.  Anyone who takes the time to educate themselves about investing can do so.  You don’t need to have the right connections or to know the right people.  From an accessibility stand point, nearly everyone has access to S&P 500 index funds.


Income Distribution

I think the common belief among most people is that income is the most important factor to achieving financial independence.  No doubt, income plays a large role.  But it is only one of the four factors I mentioned above that impact the math.


Mr. Stanley and our fellow FIRE bloggers would tell us that there are many many millionaires who have never earned a high income.


Lets take a look at the income distribution in the United States in 2015:


Average Household Income by Quintile:

QuintileHousehold Income
Top 5%$350,870
Top Quintile$206,366
Second Quintile$92,031
Third Quintile$56,832
Fourth Quintile$32,631
Lowest Quintile$12,457



The overall U.S. median household income in 2015 was $56,516, and has been growing at a compound annual growth rate of 2.0% over the last ten years – about the same as inflation.  I’m going to assume any future income growth continues to be stagnant, and is simply offset by inflation.


Saving $1M Dollars In A Reasonable Amount of Time

Ok, so now that we got that cleared up, how does someone in different income quintiles save a million dollars?  Oh, and they need to do it in a reasonable amount of time – not decades and decades – but soon enough to retire at a reasonable age – say 40 years old…. That would be about 15 years of good, hard work.  Who needs more than that?


Anyway, if we assume everyone can invest at the 7.26%, historic annual real rate of return of the S&P 500, to save $1M in 15 years, you would need to invest $3,069 per month.


Here’s what your savings rate would need to be if you earn the average income of each quintile:


Savings Rate Required To Save $1M in 15 Years, by Quintile

Income QuintileSavings Rate
Top 5%10%
Top Quintile18%
Second Quintile40%
Third Quintile65%
Fourth Quintile113%
Lowest Quintile296%

Assumes investments return 7.26% per year after inflation and incomes grow at the rate of inflation


That certainly looks doable for the top quintile.  Even for the second quintile, a 40% savings rate is very doable.  I was myself in the second quintile for most of my career, saving about 50% of my income.  But, I am not normal.


For the remaining quintiles, saving $1M in 15 years is less realistic.  It looks like a straight pipe dream for the bottom two quintiles, assuming those folks don’t move up to a higher income bracket.


Still, folks in the top two quintiles have a real opportunity to become millionaires in only 15 years.  That represents 40% of the U.S. population!  It’s not a small number of people.


Saving $1M In A Lifetime

But what about a longer period?  Most people work until they are 65 years old or so.  That’s essentially a 40 year career.  To save $1M in 40 years, you would only need to invest only $351 per month under our same assumptions.  Suddenly, that’s not such a big burden for a lot of freedom lovers.  What a difference time makes! Here’s what that looks like as a savings rate for the different income quintiles;


Savings Rate Required To Save $1M in 40 Years, by Quintile

Income QuintileSavings Rate
Top 5%1%
Top Quintile2%
2nd Quintile5%
3rd Quintile8%
4th Quintile13%
Lowest Quintile34%

Assumes investments return 7.26% per year after inflation and incomes grow at the rate of inflation


You can see what a massive difference a few decades makes, thanks to the magic of compounding.  Everyone, except perhaps the folks in the bottom quintile  have a reasonable shot at saving $1M in 40 years.  That’s effectively 80% of the U.S. population.


And yet, only 7% of us in the U.S. are actual millionaires.  So many with the opportunity to become millionaires based on their incomes, and yet so few achieving it!


The U.S. Savings Rate

That’s partly because the actual U.S. savings rate is pathetic.  Here’s what the average U.S. personal savings rate looks like:

U.S. Savings Rate 1959 - 2017


Back in the 1960s and 1970s, Americans were saving over 10% of their income.  At those levels, saving a million dollars is achievable for most people, given enough time.  But in the last twenty years, the savings rate has been much lower, averaging under 5%.   In September 2017, the most recent data point, the savings rate was only 3.1%.


Sorry folks, but 5% isn’t going to cut it.  And 3.1% is obviously due to good reasons (it isn’t).


At a 5% savings rate, how long will it take people in our various income quintiles to save $1M?


Time Required to Save $1M With A 5% Savings Rate, by Quintile

Income QuintileTime To Save $1M at 5% Savings Rate
Top 5%23 Yrs
Top Quintile29 Yrs
2nd Quintile39 Yrs
3rd Quintile46 Yrs
4th Quintile53 Yrs
Lowest Quintile66 Yrs

Assumes investments return 7.26% per year after inflation and incomes grow at the rate of inflation


So, basically, only the top two quintiles can save $1M over a career with a 5% savings rate.  And not even folks in the top quintile would do it in what I consider a reasonable amount of time – 15 years or so.  Basically, a 5% savings rate doesn’t cut it for anyone, except perhaps for the 1%ers.


You can see that our pathetic savings rate is a big reason the entire U.S. is not one big fat giant millionaire club.


A high savings rate can unlock financial freedom and a reasonably early retirement for most Americans.


But the 5% savings rate is just an average.  As you might expect, people at the lower income levels have lower savings rates than people in the higher income levels. And the differences are surprising.


According to a calculator from DQYDJ based on data from the Consumer Expenditure Survey, people in the higher income quintiles seem to save around 40% of their income on average, while people in the middle of the income spectrum save 0-20%, and lower income households have negative savings rates.


This suggests that higher income households should quite easily save $1M in a reasonable amount of time, while middle income folks can still do it, but would take longer, and the bottom earners pretty much aren’t going to save $1M without moving up the income ladder.


How To Save $1M In a Reasonable Amount of Time

Saving a million dollars is easy if you have a high income and a high savings rate.  I think most FIRE enthusiasts have both.  So, they require little time to reach financial freedom.


But saving $1M is not just doable for a bunch of freaky frugal FIRE savers, either. A big chunk of the U.S. population appears to have enough income and even a high enough savings rate to be able achieve financial freedom, if they are shown the path.


But life is not so simple as a spreadsheet.  We make mistakes, we have detours and personal financial crises, and things don’t always go according to plan.  Still, the opportunity is there for most of us.  Will you take it?



Jojo Bobo


2 Responses
  • Ann
    November 27, 2017

    I know Stanley’s book very well – in fact, think I gave you a copy back in the late 90’s when you were not so focused!! My father was the #1 character in his book – wore clothes from the Goodwill, drove a car over 20 years old, etc – and worth a bundle!!
    The leaf doesn’t fall far from the tree!!

  • Kevin
    December 7, 2017

    Good girl. I’m instilling the virtues of FU money to my daughter, and Stanley’s book is a must read in our household… save it, invest it, and be quiet about it.

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