Just how do you become a millionaire, anyway? On this day after the Forbes list of the world’s richest people came out, it seems appropriate to discuss just how you could become one of them. In the first place, being a mere millionaire these days is no indicator of great wealth, although it’s still the term thrown about the most when people (those that aren’t, anyway) discuss being rich.
In fact, I remember an interview that was done a few years ago about retirement savings in which a young girl expressed amazement when the interviewer asked about saving a million dollars for retirement. She was of the mistaken opinion that she’d never need to save even close to that amount to comfortably fund her retirement. Apparently she’d either forgotten about the effects of inflation, was independently wealthy, or was planning on marrying up. Maybe she just loved the whole mountain tent decor and would be comfortable living that way.
In any case for many that have aspirations of attaining wealth becoming a millionaire is merely the first step in the process. Given that first step or not, one must get there at some point in the process, just how do you become a millionaire?
Besides winning it, or being given your million dollars, there are two basic paths you can take toward millionaire status. You can work for someone else and invest a portion of your income, or you can work for yourself and invest a portion of your income. Either way has it’s advantages and disadvantages. In addition, there are countless combinations you can use to reach you goals within these two very broad avenues. To become exceedingly (is that even possible??) wealthy, you’ll have to either:
A) Start your own successful business, then plan and execute an exit strategy that would include taking the business public or selling it for a substantial amount of money.
B) Work for a company in the early phases of its existence and be given a portion of the business that will be worth a substantial amount of money. This method worked well for many people in Sunnyvale, Redmond, Austin, Mountain View, and Cupertino. You can then invest the substantial windfall to become quite wealthy.
C) Get one of the few extremely high paying jobs with a salary and bonus structure such that you have a substantial amount of money left over to invest. You must then invest at a rate of return that will result in your extreme wealth. Not only must you land such employment and make the appropriate investments, but if you take this route, you must live fairly frugally in the wealth generation phase. It is hard for many to resist the pull to plunk down their new found money on a 8,000 square foot golf course home, a Bentley, and trips to Monaco for the Grand Prix every year. In many of these types of jobs, your peers will live with the trappings of wealth, and it can be easy to emulate their behavior.
Of those younger billionaires on the Forbes billionaire list, 68% of those under 40 years old made their money starting with nothing, so take heart, it can be done. Getting the mindset to actually achieve that level of wealth may be almost as difficult as getting that rich itself.
What about just becoming a plain old, garden variety millionaire? Thankfully, that is much easier, and doesn’t really require too much beyond some basic financial planning and discipline. You need to make some good decisions about the direction of your life along the way. If you take the work for someone else approach, rather than starting your own business, you’ll need to plan and execute a career path that affords you enough income to invest for retirement such that you’ll reach a million dollars in assets, not including the equity in your primary residence. This can be easily done, and in fact, according to the most recent Merrill Lynch wealth report there about 9.5 million such people in the world.
For example, say you play around a bit in college, change you major a time or two, and don’t graduate until you’re 25 years old. Upon graduation, you get a decent, but not very high paying job, earning $35,000 per year with good benefits. If you plan to get only a 3% annual raise (less than the cost of living), put away 10% of your salary toward retirement (assuming no company matching, so it’s not too great of job), and earn an 8% rate of return on your investments, you could easily become a millionaire. In fact you’ll retire at age 65 with a nest egg of about $1.2 million. On this you can live with 97% of your last year’s salary of $110,000 per year until you die at 90, and leave a $1.3 million nest egg to your heirs. You could even retire at 63 and just manage to eat up your retirement savings by the time you reach 90.
The above calculations assume you’ll get a big, fat Zero for Social Security, because face it, for anyone under 35 now that could easily be the case. It also assumes a 3.1% annual inflation rate. Just how nice would an employer matching contribution be in the above scenario? If you were a bit more ambitious and received on average a 5% annual raise, you would retire with a $1.56 million nest egg at 65, so you would be a millionaire times 1-1/2. It may not seem like much, just increasing your retirement nest egg by such an amount, but in fact it’s extremely powerful. Such an increase would allow you spend $150,000 per year in retirement, instead of only $107,000. Even spending almost 50% more, your retirement savings would still continue to grow, such that when you took your last breath at 90, you’d be everyone’s favorite uncle, because you’d leave your heirs a $5.2 million present.
What if you didn’t want to wait until you were in your 60’s to become a millionaire?