Around the blogoshpere, I’ve been seeing comments that it isn’t all that exceptional to have a million dollar net worth. After all, they say, anyone putting money away in their 401K should end up a millionaire.
In the future, there will be a lot more millionaires, they claim. Well, no one can really know the future, but I’m betting that a million dollars will still be quite significant to folks 20 or 30 years from now. And I’m betting that we will still have a huge portion of the population that doesn’t have a million dollar net worth.
Will most people be millionaires?
The Department of Commerce, Bureau of Economic Analysis recently released a report (March 29, 2013) indicating that individual savings rates (personal saving as a percentage of disposable personal income) was 2.6 percent in February, 2013. Think about that. We are saving less than 3% of disposable income. How are these people going to build a net worth of a million dollars saving 3% of their disposable income?
According to the US Government Census of 2010, only 9.6% of the population had assets over $500,000 before age 45. Only 25% of the population aged 45 – 64 had assets over $500,000.
The US household median net worth in 2011 was 68,828 – including the value of real estate per the U.S. Census Bureau, Survey of Income and Program Participation released in March 2013.
Do we really expect behavior change or inflation alone to bump these numbers? Do we really think it will be common to have a million dollar net worth in a decade or two? Hmmm.
What does a million dollars do for you?
Lets assume that your house is half of your net worth. Your house may appreciate in value with inflation (or not as was the case in 2009), but it most likely won’t earn any dividends, interest or other income for you. Lets chalk up your house as a non-productive asset.
That leaves $500,000. What can half a million do for you?
- At 4% interest (before taxes) you could have an extra $20,000 a year to spend, without doing a lick of extra work.
- You could have that $20,000 a year for about 27 years, assuming you kept the withdrawal amount at $20,000 and earned 4% and didn’t have to pay any taxes on it. Even if inflation took half the value, that is still enough to buy a bit less than $200 (in today’s dollars) of food a year ($10,000 divided by 52 weeks).
Now let’s assume you own a house but you don’t include it when calculating your net worth.
- If your million dollars is made up of income producing assets like stocks, bonds or rental real estate and earned 4% a year you could have an extra $40,000 a year to live on. You could withdraw that $40,000 a year for 27 years, assuming you kept the withdrawals at $40,000 and earned 4% each year and didn’t have to pay any taxes on it.
- If you kept your withdrawals to $20,000 a year, you wouldn’t use up your million for around 54 years (again with no taxes and earning 4% a year).
- You could leave the million dollars invested in something paying 4% for 20 years and end up (again, assuming no taxes) with over 2 million dollars.
A million may not be enough to allow you to live on the interest for years, but it is still a lot of money. Wouldn’t you rather end up a millionaire than not?
By the way, you can invest and never have to pay taxes on the invested amount by putting the money into a Roth IRA or a tax free municipal bond (or fund) in your own state.
A million isn’t what it used to be.
Granted, a net worth of a million dollars had more buying power years ago. It is no longer a fortune. A million dollars in 1970 would buy as much as $5,983,659 this year. But a million is still a milestone and more that most folks over 20 will see in their lifetime. In 30 years, at an inflation rate of 3.2% you’ll need around 2.5 million to equal the buying power a million has today (at least according to this online calculator).
It’s easy to get to a million dollar net worth.
It isn’t rocket science. Most of us know how to do it, but knowing how and actually being consistent and persistent enough with our savings and investments are two very different things. Most people get sidetracked or discouraged or change their goals or run into hard times along the way. Most people aren’t consistent and persistent.
Start today. Get out of debt. Save more than you spend. Invest when you have that emergency fund. Keep at it year over year, every year. You will be one of those who make it to and past a million dollar networth.
What is a million dollars worth to you?