HOW THE AVERAGE PERSON CAN BE A MILLIONAIRE BY RETIREMENT
Two important facts to consider
It’s not impossible at all. In fact, the average person can achieve the coveted millionaire status perfectly within their lifetime and I will show you how.
WHAT IS FINANCIAL FREEDOM?
The goal is to be financially free!
I mean, who doesn’t want financial freedom? Living financially free means living a life by your own rules and not having to work if you don’t want to. Waking up when you feel like it.
It’s the freedom of comfortably living within your means, whatever those means maybe, and not having to worry about how to make ends meet.
Sign me up!
Well, if you are starting your journey toward financial freedom then you better be thinking about things like retirement. Some of you might be taken aback by the R word.
People think about retirement the wrong way. Retirement isn’t just for older folk in their 70’s. It’s for everyone that wants to be financially free. You can retire when you’re 25 if you have the means to be financially free at that age.
So let’s get it straight. Retirement is financial freedom planning!
“Retirement is financial freedom planning“
GrindPolicy #40
WHAT’S $200,000 REALLY WORTH?
How many people are actually able to take care of themselves from their retirement savings?
According to Federal Reserve SFC Data, the average retirement amount for people at the age of 65 is only about $216,000. I’ve got news for you. This doesn’t amount to much at all! All that money will disappear faster than you can count it.
So what does $200,000 really do for you when you’re retired? Well, if you retire when you’re 65, that means every year you’re alive you’re going to obviously spend money on bills.
Let’s dig in and analyze the average American.
HOW FAR WILL $200,000 TAKE YOU?
As you can see from the infographic, the average household in America has about $3,477 worth of expenses every month. Although we won’t calculate for the entire household.
The key point I’m making here is that it’s entirely possible for each average individual to become a millionaire. So if a household is comprised of two adults, then I’m talking about two million dollars.
For our example, we will only consider one person in the household incurring expenses. We will assume this one individual only has an even $2,000 worth of bills every month.
Now, $2,000 worth of bills can be a livable amount of expenses. Most people probably pay this amount or less if they own their own home.
When you’re retired you technically should own your home. With this, you’re only paying for utilities and some general upkeep. Therefore minimizing your overall expenditure on bills.
However, all costs included, if you only had $2,000 worth of bills every month then you’re spending $24,000 every year.
Add this amount every year you’re alive past retirement and your $200,000 only lasts until about 8 1/2years. To clarify, if you’re 65 years old when you retire, then your nest egg will take you to the age of 73.
LIFE EXPECTANCY
The average human life expectancy is 78 years old. You have to know that with every year that you live after 73, you’re going to be spending another $24,000.
If you reach the average life expectancy then that’s an extra $120,000. Additionally, if you can’t work, where’s that money going to come from?
Do you really want to put that burden on your loved ones? They have their own retirement to worry about.
On top of that, there’s no room in this setup for you to have spending money so you can enjoy your life in your later years. Evidently, that’s not the point of retirement.
What happens now when we add in the additional expenses to travel and just have fun? The amount required increases.
If you intend to have some money for yourself without having to ask your loved ones for it then $200,000 isn’t going to be enough!
NOT IMPOSSIBLE
The average person can become a millionaire when they retire.
In fact, my finance professor in college told me an interesting statistic that the average human being will spend over two million dollars within their lifetime.
The key is to start saving some of the money that comes your way as early as possible. That means the moment you start making any kind of income you should be putting aside some portion of your money for your retirement.
The earlier you do it, the easier it will be.
RECOGNIZE THAT RETIREMENT IS RIGHT NOW
I know retirement sounds like some far-off thought. However, its needs and effects are not. Retirement is right now.
What do I mean you ask?
When you retire you are benefiting from the things you do right now.
Consequently, if you do nothing right now toward your retirement then you won’t have the happy retirement that you should have!
Some people work past the retirement age for fun. But those people are few in number compared to the masses. Most people who work past retirement age only do it to make ends meet.
Their retirement savings give them enough to scrape by as if they never left that paycheck to paycheck lifestyle. This is not what retirement is supposed to be.
HOW MUCH MONEY DO YOU NEED?
So let’s break this down. How much money do you really need?
A good way to think about it is to list the cost of all your expenditures in a month:
- How much are you paying in bills right now? (all the essentials)
- How much money do you spend on fun? (everything else)
Now, go ahead and add any extra amounts you would like to be able to spend to support your desired lifestyle.
To emphasize, if you want a bigger house or nicer car then go ahead and add in the amounts you’re willing to spend. If you like to travel, think about how often you would like to travel and the average you would spend on each trip.
So what is the cost per month of your desired lifestyle?
WHAT ABOUT $4,000
Let’s test an even $4,000.
$4,000 a month could give you a moderately luxurious lifestyle. We can pretend you have $400,000 saved up instead of $200,000 and still retire at the age of 65.
But there’s still a problem with this amount. What if I told you it’s not big enough?
Don’t forget the whole point I mentioned above is that this will only last you about eight years. At $4,000 every month, you’re looking at $48,000 every year in expenses.
So that means every year you’re alive after 73 years old, you need an additional $48,000 to spend. Here’s a look at the numbers.
UP, UP AND AWAY
As I previously mentioned, the average life expectancy is 77 years. But as time continues to go on that age continues to go up! Many people are living well into their 80’s.
Therefore, the closer you get to 80, the amount of money you need to support your lifestyle becomes a lot more than $200,000.
Now only imagine if you lived to 85. As you can see, your total required savings is a lot closer to $1,000,000!
Let’s not forget to leave some of it behind for your loved ones. As such you can add even more to that total.
MAKE THE IMPOSSIBLE POSSIBLE
So now all of a sudden your retirement amount has now equaled something that seems impossible. Yikes! How many of us are expecting to be millionaires?
You might be thinking “wow, you are absolutely out of your mind now. You want me to do the impossible and save up $1,000,000”
Well, what if I told you it’s possible and completely doable for the average citizen of America?
That’s right! You can!
ROADS TO 1 MILLION
There are different paths you can take on the road to 1 million. You could be saving less per month and end up with higher return earnings. The rates above are calculated at a 6% return rate with contributions being made monthly.
If you had a higher return rate you could earn well over a million!
Alternatively, another way to accumulate $1,000,000 is to save $300 every month for 35 years in an account that earns 10% in its return. This may sound more appealing to some over saving $1,000 a month.
But definitely aim for $1,000 if you’re trying to play catch up on lost time.
At a 10% return on the chart above, you would have saved well over $3,000,000!
Saving more money and/or earning more on your return is what will help you into early retirement.
EARLY RETIREMENT
Time to break down some more numbers for early retirement. After all, we don’t want to spend most of our lives working.
We obviously want financial freedom asap!
Don’t forget that the point of retirement is to retire happily but also to still have our years to live where we have the health and ability to use those years to the fullest potential. We don’t want to spend the majority of our lives working.
So, if you have 1 million dollars from the age of 65 to 85, start adding up the amounts if you want to retire early. Maybe you want to retire at 64. That’s $48,000 you add to that amount.
For every 5 years go ahead and add $240,000.
- 65 $1,000,000
- 60 $1,240,000
- 55 $1,480,000
- 50 $1,720,000
- 45 $1,960,000
- 40 $2,200,000
- 35 $2,480,000
So to live at $4,000 a month and retire at the age of 35 and expect to live to 85 you need 2480000 dollars.
This is just a penny for your thoughts to help you calculate and have an idea of how to plan the cost of your financial freedom.
Investment Calculator
Use this online investment calculator at Calculator.net.
You may experiment with different return rates as you can earn 8% or even 10% on some investments which drastically alter the years it makes take to reach financial freedom.
I encourage you to experiment with the numbers to get an idea of how much you will need to save.
Below are some figures to help give you an idea.
How to become a millionaire in 30 years
At a return rate of 6%, you will need to save $1,026.15 at the end of each month to reach the target of $1,000,000.00.
Total Contribution: $369,415.30
Total Interest Earned: $630,584.70
How to become a millionaire in 25 years
At a return rate of 6%, you will need to save $1,478.66 at the end of each month to reach the target of $1,000,000.00.
Total Contribution: $443,597.36
Total Interest Earned: $556,402.64
How to become a millionaire in 20 years
At a return rate of 6%, you will need to save $2,205.37 at the end of each month to reach the target of $1,000,000.00.
Total Contribution: $529.288.82
Total Interest Earned: $470,711.18
How to become a millionaire in 15 years
At a return rate of 6%, you will need to save $3,485.39 at the end of each month to reach the target of $1,000,000.00.
Total Contribution: $627,370.28
Total Interest Earned: $372,629.72
How to become a millionaire in 10 years
At a return rate of 6%, you will need to save $6,154.85 at the end of each month to reach the target of $1,000,000.00.
Total Contribution: $738,582.25
Total Interest Earned: $261,417.75
How to become a millionaire in 5 years
At a return rate of 6%, you will need to save $14,391.43 at the end of each month to reach the target of $1,000,000.00.
Total Contribution: $863,485.95
Total Interest Earned: $136,514.05
WHERE TO GET 6% RATE OF RETRUN TO HELP YOU BECOME A MILLIONAIRE?
As you can see, most of the calculations in this article are not just about the savings you can personally put away but also the rate of return you can earn on those savings.
It’s the investment of your money that will help you go from Zero to Hero and the rate of return is your golden chariot.
According to Investopedia.com, A rate of return (RoR) is the net gain or loss of an investment over a specified time period.
You can invest your money in STOCKS, RETIREMENT ACCOUNTS, REAL ESTATE, and more. If done correctly, each of these investments can help your money make more money.
STOCKS
Although much riskier than retirement accounts, stocks can make great investments. Moreover, the money you make from stocks is much more accessible than from retirement accounts.
Take for example the S&P 500.
“The S&P 500 index acts as a benchmark of the performance of the U.S. stock market overall, dating back to the 1920s (in its current form, to the 1950s). The index has returned a historic annualized average return of around 10.5% since its 1957 inception through 2021.” – Investopedia.com.
You can invest in stocks like the S&P500 through websites like Etrade.com
3 Basic Types of Retirement Accounts
- 401K
-
IRA
-
Roth IRA
These are the three most basic retirement account types. Keep in mind, there are others that are similar like SEP IRA and a Simple 401(k), but they are just slightly different alternatives to the basic ones we will cover.
401(K)
Companies often offer a 401(k) as a benefit to your employment. It works by diverting a portion of your paycheck to your 401(k) account. For example, if you get paid $1,000 a paycheck, then you might see a deduction of $150 dollars toward your 401(k).
401(k) TAXES
A nice feature of a 401k is that the money being diverted from your paycheck is tax-free until it’s withdrawn once you actually retire.
401(k) EMPLOYER MATCHING
An employer may even match a certain percentage of your pay and contribute that money into your account as well. This percentage can vary but can often be around 2 or 3%.
Be aware that employers who match contributions often need you to be “vested” before you can have any of the money they put toward your account. This means they are looking for long-term employment.
An employee who leaves before the vested time period is not entitled to employer-paid contributions. You will however have access to your personal contributions.
Once the vested time period is up you will have access to both employer and employee contributions. Vested time periods vary but can be around 3 to 5 years of employment.
401(k) CONTRIBUTION LIMITS
There’s a limit to how much you and/or your employer can contribute to your 401(k) in a year.
For a 401k, the limit you can contribute is up to $20,500 in 2022. The total contribution limit, including both employer and employee contributions, is $61,000.
If you’re older than 50, then these amounts are slightly different. It’s $27,000 for self contributions and $67,500 for combined employer and employee contributions.
401(k) INVESTMENTS
Once that money is in your account it is invested. However, don’t expect anything crazy. The places you can invest in with your 401(k) are usually very limited.
Mostly in safer, low-risk stocks, that will build in value more slowly than any high-risk stocks you can pick on your own.
But make no mistake, it will be well worth it over the long haul. Keep in mind that as your money grows it’s still tax-free until you’re ready to withdraw.
401(k) RETIREMENT
You have to be a certain age to be able to pull out the money from your 401(k) without any withdrawal penalties. This is approximately 60 years of age.
When you do start withdrawing your retirement money you will get taxed at the current tax rates. However, this is usually more beneficial than being taxed upfront before the money enters your account. Only the amounts that are withdrawn are taxed as income.
Most people who have retirement income from a 401(k) are usually earning less overall than when they were working. Subsequently, the taxes owed are usually less as well.
IRA
An IRA is an Individual Retirement Arrangement. As you can guess, IRA’s are plans that are mostly handled by the individual or account owner. If your employer does not offer a 401(k), you can set yourself up with an IRA.
IRA TAXES
Just like with a 401(k), your IRA contributions are tax-free until it’s withdrawn. The money can be withdrawn at the same ages as the 401(k) with the same penalties for early withdrawal.
IRA CONTRIBUTION LIMITS
In contrast to a 401(k), the contribution limits for an IRA are much smaller. You have a yearly limit of $6,000 as of 2022, or $7,000 if you’re over 50.
IRA INVESTMENTS
Importantly, you will have more control over how the money is invested. There are tons of options for different types of IRA accounts.
ROTH IRA
A Roth IRA is very different than a traditional IRA and 401(k). An important difference is that you need to make under a certain amount to be able to contribute to a Roth IRA.
Another difference is that your income is taxed before they enter your account. This means when you’re ready to withdraw, you won’t pay any taxes since the money has already been taxed.
Further, a Roth IRA lets you withdraw your money at an earlier age without penalties. Keep in mind there are still some restrictions.
With a Roth IRA, contribution limits are similar to traditional IRAs.
Social Security income is a great benefit if it’s available. However, you have to earn your social security income depending on how long you work and where.
You also have to consider the fact that legislation is constantly changing. Years from now who’s to say where Social Security will be.
Social Security gives you an average of $1,400 a month but this amount is not guaranteed.
In fact, in the year 2037, Social Security will no longer be able to pay out its maximum owed contributions. They will only be able to pay out 75%.
That means for every $100 that is promised to an individual who is now retired they will only get $75.
Consequently, this is why I encourage you all to plan on your own retirement without counting on social security.
It’s better to try and save this money on your own and then have Social Security income be an extra cushion for your nest egg.
“Don’t leave the fate of your future in the hands of others“
GrindPolicy #48
This is the mistake that many Americans are making and they are paying the price for it.
There are so many people who are barely living off their disability checks or Social Security checks.
Their lack of financial freedom restricts them to the confines of their home when they should be out enjoying the world.
CONCLUSION
First, calculate what your desired cost of living is per month. Then start your retirement savings asap!
Whether that’s saving money in a retirement account like a 401(k) or IRA. Even if you just decide to save money and invest it in your own choice of stocks.
Altogether, this will put you on the path to financial freedom. If you do it right you can be a millionaire in your lifetime!
