Personal Finance

Case Study: Yes, It IS Possible to Retire a Millionaire With a $30k Starting Salary

Expertise: Personal Finance
13 Articles Written
retire-millionaire

In a recent article, I made a bold statement. Readers completely ignored it. In the article, I stated:

“The reality is that it is completely achievable for the majority of households to build a net worth of $1,000,000 or more over the course of a working lifetime.”

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If it’s so simple and obvious that nobody argued the point, then why doesn’t everybody do it?

The reality is that while it is actually very simple, it isn’t easy.

A recent study by Vanguard, How America Saves 2016, looked at savings in 401(k) retirement accounts in America. There were some interesting findings. While the average 401(k) balance in the US was $96,288, the median was much lower at $26,405. What does it mean when the average, or mean, is much higher than the median? It means that some people are doing really well, while most people are not. Those doing well pull the average value higher, away from the median.

This is the kind of data analysis that is usually used to support anti-inequality campaigns. As expected, the Time article goes on to demonstrate that people with higher incomes have higher average and median balances. This is to be expected: Income and wealth are correlated. But what is overlooked in the analysis is that the discrepancy between the average and median balances is not only significant, it is also spread across all of the income ranges.

So, while people with higher incomes will tend to end up with higher balances, nevertheless every income level has a percentage of people who do a great job of investing for the future — and many who do not. It is not just a function of income; those on low incomes can build up a worthy nest egg. What the data suggests is that, given your income, you can personally have a huge impact on your financial future.

Related: 4 Retirement Account Horror Stories That’ll Keep Investors Up at Night

Obviously, a retirement savings plan like the 401(k) in the United States is not the only approach to wealth-building. Net worth can be built through equity in your own home, businesses, and, of course, rental property. Savings and other valuables will also contribute. Interestingly, many business owners and real estate investors will forego contributions to retirement savings plans in favor of a more “all-in” approach. Yet, as of 2013, less than 10% of American households had a net worth of $1,000,000 or more. Why is it so hard?

In this article, I first want to demonstrate that attaining a net worth of $1M is possible even on a low income by walking through an example. Then I want to consider some of the challenges that people face, especially at lower income levels. Finally, I will consider some of the opportunities that this knowledge opens up.

tax-changes

Pay Yourself First

In the classic book The Richest Man in Babylon, author George S. Clason exposes this timeless and foundational principle of wealth building: Pay yourself first.

The principle is that, no matter how much you make, if you take a portion of your earnings and set them aside for investment — never touching them for your day-to-day living expenses — then you will eventually wind up wealthy. Clason’s recommendation is to set aside at least 10%, living on no more than 90% of your income.

Now, BiggerPockets is a website about real estate investing. However, to keep things very simple, and to drive home the point, I am going to use the very accessible example of simply using a standard retirement fund investment to achieve the goal.

In this scenario, Amelia is the sole income earner for her household. She begins with nothing saved for retirement at the age of 25. Contributing regularly and consistently to her generic retirement fund for 40 years, she eventually retires at the age of 65.

Assumptions

The retirement fund for our example is very generic. It is not modeled on anything specific such as a 401(k). However, it does ignore taxes and fees; the percentages discussed would need to represent the net return.

Salary

Amelia starts at the age of 25 with an annual salary of $30,000. This puts her household income just below the 29th percentile in 2014 numbers. In making the claim that “the majority of households” can achieve a million-dollar net worth by retirement, I must at least show that more than 50% of households can do it. This example suggests that it is available to about 70% of households at face value.

Inflation

I assume that Amelia works hard and benefits from a modest annual pay increase, at least partially offsetting inflation. The model applies a 2% increase to Amelia’s salary each year for 40 years. Long-term average inflation in the United States is 3.22%; since 1990 the number is between 2.5-3.0%. Giving Amelia a 2% raise each year is slightly under inflation and therefore relatively conservative.

As a result, in Amelia’s final year in the work force, just prior to retirement, she earns $64,942.34. This would put Amelia’s household at about the 55th percentile for income. So, while Amelia has had an increase over time, she has never earned “great money.”

Contribution

For the purposes of our scenario, Amelia has read The Richest Man in Babylon but doesn’t have a lot of money, so she decides to set aside exactly 10% of her gross income for investment. She never increases that percentage.

Interest

Amelia invests in an S&P 500 index fund. Some sources will quote that the S&P 500 has averaged around 12% per annum since its inception in 1970. While this may be true, real world markets do not provide a smooth return. In fact, the S&P 500 has fluctuated wildly from year to year. In the chart below, you can see the results of investing in the S&P 500 from 1976 through 2015 inclusive, following the same scenario. This represents the most recent 40-year period available at the time of writing. As the chart demonstrates, the investment returns very closely mirror a smooth 8% annual return. The example uses 8% as a reasonable long-term expectation.

Meet Amelia, the Millionaire

So, is Amelia successful?

The chart below demonstrates the cumulative value of Amelia’s retirement fund over her 40-year working career.

As you can see from the chart, over time, the S&P 500 has tended toward very similar results to an 8% annualized return. It is absolutely true that there are fluctuations, so there would have been better and worse times to retire. However, both result in a retirement account balance of just over $1,000,000.

Challenges

If it was so easy for Amelia, why doesn’t everybody do it? To quote Jim Rohn: “Because it’s easy not to do.” But let’s take a look at some of the specific challenges that people face while trying to achieve financial goals.

Cost of Living

The lower the initial salary, the more difficult it is going to feel to set aside 10% of income. Everybody has basic living costs that will take up the bulk of the earnings. Most tax systems account for this with a graduated or progressive income tax. In other words, people are charged less tax on the first several thousand dollars earned. That’s because this money is essential to meeting basic needs.

Related: Out of College, Should I Invest in Real Estate or Retirement Accounts?

Using 2016 U.S. federal tax rates, if Amelia earns $30,000, she will pay $4,036.25 in federal income tax, leaving $25,963.75 per year or $2,163.65 per month to live on. If Amelia sets aside $3,000 per year (10% of gross income) for investments, this will reduce her monthly budget to $1,913.65. She will be acutely aware of that $150 per month which would really help her family’s lifestyle. (Depending where you live, there may also be state/local taxes).

Thus, Amelia will find it harder to set aside 10% of her income for investment than someone who earns $100,000 annually. However, it is also true that the majority of people expand their lifestyle to match their income — and therefore find it difficult to reduce their expenses to free up 10% of their income for investing. While it will be harder with lower income, most people will find it difficult unless they start very early establishing good habits.

Location

That $30,000 will buy you a very different lifestyle in different parts of the country or around the world. In particular, cities are notoriously more expensive, and accommodation alone could consume a very large percentage of that budget. Living in an expensive city puts further pressure on Amelia to spend a higher percentage — maybe even every penny — of her income every month.

Persistence

Does Amelia lack the will to stick to the plan? Do you? It gets especially difficult when big “unexpected” expenses pop up out of the blue. This is the main reason that, while it’s simple to become a millionaire on paper, the difficulty lies in the execution. It is easy to justify anything to ourselves, but if you are not working toward your goal consistently, it will become more difficult to achieve over time.

Lack of Control

For many investments, you have no control over the returns. Generally, the greater the expected return, the greater volatility there is. For example, you can probably get a fixed term investment with your bank for 3.5-4.0%. This return is very reliable. But it’s also well below the long-term returns you can expect from other investment classes. Meanwhile, investing in an S&P 500 index fund, your investment could lose 20% of its value or more in a single year.

Time

The above example assumes that you actually have 40 years available to you before you want to retire and start cashing in on your investments. If you are older and have less time to retirement, then you will need to contribute more. This will either mean a greater percentage or if you happen to earn a higher income than our example, then at least more dollars. The same applies if you want to retire young and live off of your investments. It’s important to note that many government-controlled retirement plans like 401(k) have restrictions on when you can draw down the funds. Most of these are at or around a government-determined retirement age; generally, this is around age 65 but may increase over time as expected life spans increase.

Opportunities

Now that we’ve seen Amelia — who started with a salary of $30,000 per year and only got modest increases throughout her life — retire as a millionaire, let’s consider some ways in which your situation and choices may give you some advantages that Amelia didn’t have.

Contribution

First, it’s important that you begin investing immediately. This is the one thing that Amelia did well, and look where it got her. Take charge of your finances, get on a budget, and start paying yourself first. Put aside at least 10% of your income for investments. It’s pretty clear that if you don’t invest anything for the future, in the future you won’t have anything. You can contribute to a retirement fund as described above, or you can look for more lucrative investments.

Education

Learn about money and investing. What options are available? How does it work? What are the risks? What are the expected rewards? BiggerPockets is a fantastic place to learn about real estate investing as one option for your future. For example, if you learn how to invest in real estate using time tested and proven methods, you should be able to significantly outperform Amelia.

Income

If you are not earning enough, take charge of your situation. What can you do to get a promotion? What about starting a small business on the side to earn extra income? If you are earning more than our example, then run your own numbers and see what you have available to you.

If Amelia’s starting salary had been $50,000 per year rather than $30,000 per year, then she would have retired with more than $1.8M.

Play Great Defense

If you are on a low income, you can still achieve impressive results financially. But you will need to play excellent defense (i.e. budgeting and investing consistently) to meet long-term financial goals.

Related: The Average Retirement Account Has Less Than $100k: Here’s How Real Estate Can Help

If Amelia had set aside 15% of her gross income instead of 10%, she would have retired with more than $1.6M. This may not have been easy for Amelia, but what about you?

Opportunities

Take advantage of opportunities, such as company matching contributions, if they are available to you. Find out about tax breaks or advantages of any retirement plans available in your area. (Different countries have very different plans available, so it’s important to get localized information on this.)

If Amelia’s company matched her contributions up to 5% of her gross income, that would have been the same as if she’d contributed 15% herself. This means that she would have retired with more than $1.6M. She would have gained more than $500,000 in bonus money from her employer!

Time

If you are young, time is on your side. But only if you take action. The longer you wait, the more time will shift its loyalties and begin to work against you.

Conclusion

Now, imagine if Amelia had combined all of these options. What if Amelia worked hard in school and landed a great job with a starting salary of $50,000, contributed 15% of her gross income, received a match of 5% from her employer and started investing at age 25? Amelia would have retired with more than $3.6 million dollars. And if she’d invested in real estate? The sky’s the limit.

That’s retiring in style.

[Editor’s Note: We are republishing this article to help out readers newer to our blog.]

What does YOUR retirement plan look like? Any factors we didn’t take into account in this case study?

Let me know your thoughts and opinions in the comments section below!

In 2013 Brad awoke from lifelong financial slumber and took responsibility for his family’s financial future. His primary vehicle for wealth-building is buy-and-hold real estate. He is passionate a...
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    Balencia E. from McMinnville, Tennessee
    Replied over 3 years ago
    While this article has merit in its analogy and that if a person can have that kind of life, where jobs were secure and could be counted on, and that companies gave automatic raises and do not discriminate against age, and that assuming a person grew up with encouragement and self-worth, then one could follow the 10% rule of saving and all would be well and those who had that same life but do not chose to follow the 10% rule, could be counted as it being their free choice (or laziness) to fail. But that is not what life is like for everyone. Many things in life halt progression and life keeps pushing them down until they see no future and are convinced of it by their experiences. Without the correct training, mentoring, help, and encouragement, a person doing it all alone could not possibly make correct choices to make them millionaires. They would read this article as not for them. What I would like to see is a more realistic analogy for those who are poor (earning less than $9K a year), can be elderly and single, and have nothing to live for, as they see it. How can we use this same platform of living to show them they can do it too (and I know it can be done). Here is what I see. Change that 10% savings rule to 1% in the beginning. Increasing it a little at a time as funds become available (a temp job, selling things, collecting cans and turn them into the recycling center, anything that will make them a bit of money to save). As they are saving, learn all about real estate (because as I see it, it is the ONLY way they can pull through and out of their misery in a short period of time of 5 to 7 years). Yes, live by a budget, cut back into survival mode, meaning no frivolous expenses, and make money anywhere you can get it (except that which is illegal). Make sure in that budget you include your survival necessities, your savings (pay you first), cut back to cheaper things like cell phone (a prepaid cell phone can be as little as $15 a month), bank accounts (or none at all which saves $10- $15 per month), no credit cards (can save up to 26% a year per credit card), no smoking cigarettes (can save up to $5 a day), etc, (you get my drift). And follow Brandon Turner and BiggerPockets to gain the encouragement to carry forward. They are the only ones I see are honest, down to earth, and genuine helpful to the rest of us. It will take longer to accomplish that first sale but once that happens then everything will move faster. How can I believe that? Because about 2 years ago I created a complex budget with that 10% savings “pay yourself first” idea (starting at 1%) and saw my room mate (as I made it for her) go from zero money to having a cash flow of $700 and a savings of $900 in 5 months with her job (she lost her job after 5 months and all savings had to be used to survive-she is now starting all over again). My room mate and I are now going to do the Real Estate Investing together. I have been a pro-member since November (took me 3 months to save money for that membership). Our goal is to buy our first property by June of this year (the 90 days challenge).
    Brad Lohnes Investor from Cambridge, Waikato
    Replied over 3 years ago
    Hi, Balencia. Thank you for reading and taking the time to leave your thoughtful comments. You make some excellent points. Life is certainly not smooth and simple. And many things happen. You’re right that people can find themselves, for whatever reason, in a difficult situation and might want some advice on how to get out of it. Unfortunately, the format of an article makes it impossible to cover all possible scenarios and issues. The purpose of the article was to demonstrate that, even on a relatively low (30th percentile) starting income, and yes, making a few assumptions, it’s actually possible to achieve some financial success. While I didn’t account for every possible negative event, I also didn’t account for innumerable positive events. Promotion and out-of-band pay increases, investing in education and skills development to jump to a more lucrative career path, starting a side hustle to generate additional income, the list goes on. I started on $37k per year but certainly haven’t relied on a 2% raise every year. You mention advice for people earning $9k per year. I have to be completely honest – I have no idea how to do that. I couldn’t possibly instruct someone how to live on $9k per year and maintain integrity. I think that this requires specialized knowledge, either from someone professionally trained in helping people on extremely low budgets or someone who has done it themselves. It sounds like you have some experience in this area perhaps? 🙂 Your advice of setting the savings goal to 1% to begin with is very good. It is effective particularly when you can’t seem to cut 10% but want to get started. The amount can increase as you start to earn more. In any event, I’m glad to hear that you are making a start and getting things sorted for your future. I wish you the best of luck!
    Chinedu Michael Onuoha Investor from Cleveland, Ohio
    Replied over 3 years ago
    So many great write-ups on Bigger Pockets, sometimes I just read and almost forget to put them into practice and invest. Bigger Pockets sincerely is a gold mine…
    Dustin Blake Smith Investor from Breaux Bridge, Louisiana
    Replied over 3 years ago
    First time on this site that I saw a name listed I know. Robert T. Kiyosaki’s Rich Dad Poor Dad is what first got me into the investing side, while Richest Man in Babylon is what sparked the desire I had to live on less into action. Both were assigned reading in high school Economics class and I appreciate the refresher here. I have heard this many times, and thankfully I started the first year that I started receiving a paycheck. Yes, riding the market may not be the best investment, but it was the start and the fallback if for whatever reason real estate or other avenues fall through. I just needed the reminder about budget even living on so little for now to remind me not to wait to set $ aside for investing. Thanks Brad!
    Steve B. Investor from Centralia, IL
    Replied over 3 years ago
    Very informative article on how to save for retirement, starting early. I wish this along with other financial education would be included in our children’s schools at an early age. Too many kids get out of high school with no idea of how finances work in real life. I agree that a 2 pronged approach is probably the wisest, saving and leverage, but you have to balance it and be as educated as possible. I was fortunate enough to start in my 401k at an early age with company match, however I just recently started leveraging my equity to purchase buy and hold rentals thanks to reading Rich Dad Poor Dad. Every high school senior should be required to read this article. Thanks
    Jonathan Jaime Velarde Rental Property Investor from Thousand Oaks, CA
    Replied over 3 years ago
    I wish high schools across the United States would focus more on teaching finances and how to invest consistently to reap the benefits in our later years. I just got my significant other and brother to start contributing monthly (automatically) into their Vanguard Retirement accounts. They say “it’s so easy I don’t even have to do anything”. I agree with them. I’m currently active duty in the military and saving more than 15% of my income, with no debt, and school paid for when I get out next summer. It’s so easy to build wealth, but people want to make excuses and go out to eat an extra 3-4 times per month. I try my hardest to share my knowledge with my peers and some take the advice while others go buy a new Dodge Charger (true story) and are married to a car payment for the next 6 years. The book that immediately got me hooked on Real Estate was The Art of the Deal by Donald J. Trump. Immediately after that I read the Rich Dad Poor Dad series, and then all the BP books etc. If you took the time to read this you obviously care about your future so do something about it! Quit making excuses and start watching your bank account grow by contributing consistently. You can read every book in the library and talk to dozens of financial wizards, but at the end of the day it comes down to you and your ability to make things happen. I hope this motivates people who are wanting to start investing and I hope to see a massive amount of millionaires when I retire! Jonathan Velarde Cpl/USMC
    Ken H. Rental Property Investor from Bodega Bay, CA
    Replied about 3 years ago
    I was a cool to buy a C class turnkey SFR around $50k…6 months later blew another $25k to evict the tenant and repair their damages. Now I’m hurting, taking out 401k hardship withdrawals to get by. Sometimes it doesn’t work like you hope so tread carefully to all the new guys or you’ll end up like me.
    Jessica Merrill from Cedar Falls, Iowa
    Replied about 3 years ago
    I’m glad I’m reading this as a 24-year-old! I don’t have a lot of income yet, but I’ve been saving consistently for the last 6 months since I graduated and started my career. I need to learn more about investing and get started!