How Long Does It Take To Become A Millionaire?

Generally it’s pretty poor taste when a billionaire tells other people to contribute more money to anything.  It’s like sharing a cab ride with Warren Buffet and he asks you to pay with your last $10 bill when he’s got a wad of $100s.  Not cool.  However, Warren’s New York Times op-ed piece finally highlights what Americans everywhere have been wondering all along.  Who are these “millionaires” President Obama and the Democratic party in Congress keep targeting?

In practically every speech on taxes, President Obama likes to pit the wealthier population against everyone else by using the term “millionaires” to pay their “fair share” of taxes.  Class warfare is unnecessary.  As you know, President Obama wants to raise taxes on individuals making $200,000 and families making $250,000.  First of all, why does $200,000 + $200,000 = $250,000 instead of $400,000 as a couple is beyond me.  Is one spouse supposed to suddenly make only $50,000 from $200,000?  Give me a break.  Talk about blatant sexism.

What’s more interesting is how President Obama keeps on referring to those individuals making more than $200,000 as “millionaires”.  Last time I checked, if you make $200,000 a year, you aren’t necessarily a millionaire.  In fact, you are likely far from being a millionaire!  But according to President Obama, it takes you a nanosecond to become a millionaire once you make $200,000 a year.

HOW LONG DOES IT REALLY TAKE TO BECOME A MILLIONAIRE?

If you are earning $200,000 a year in California for example, your after tax take home pay is roughly $140,000 (30% effective tax rate).  Let’s say the very next day after getting your Master’s in whatever, you hit the jack pot and land a plum job making $200,000 at the age of 31.  You are a Financial Samurai reader and save an aggressive 50% of your after-tax income ($70,000), earn a 2.3% risk free annual rate of return, and never stray from your savings habits.  It would take you roughly 14 years, at $200,000 a year in gross income to become a millionaire!  Not bad by the age of 45, but you’re living like a 25 year old in the process.

Now let’s get more realistic here and assume that you save 20% of your after tax income, $28,000 in this case.  The other $112,000 is spent on tuition for two kids, food, travel, clothing, rent/mortgage, transportation, things and vacations.  It would take 36 years to accumulate $1,000,000 in savings.  You’d be 67 years old by then and ready for Social Security, if it’s still there!  But, because your taxes just went up by another 5% if our government gets their way, it will take you closer to 43 years to get to millionaire status, or 74 years old, hooray!  Even if you model a constantly 4% rate of return on your $28,000/annum savings, it would still take you more than 25-30 years to accumulate $1 million.

Finally, let’s get brutally realistic here and go by the national savings rate of 5%.  If you were to save a pitiful 5% of your after tax income a year, it would take you 143 years to get to that magical $1,000,000 nut!  In other words, you will never get to millionaire status at $200,000 a year because nobody lives until 174 years old except for Yoda and Sookie’s boyfriend Bill from TrueBlood.  14 years, 36 years, 43 years and 143 years is a far cry from a nanosecond, don’t you think?

I’m sure many of you believe that you will have returns like Warren Buffet and get to millionaire status much quicker than the examples above, even though the markets have gone nowhere for the past 12 years.  I wouldn’t expect anything less than genius investors from the Financial Samurai community!  Unfortunately, some of you will also waver from your savings rates and actually lose money in the markets too.  Hence, let’s just go with the 10-year yield risk free rate and monk-like savings discipline shall we?  Thanks.

THE DEFINITION OF A MILLIONAIRE = A MILLIONAIRE

Warren Buffet sets our clueless politicians straight by suggesting we raise taxes on those making over $1 million a year.  Brilliant!  Let’s raise taxes on millionaires, you know, those who make over $1 million a year.  If the President insists on using the word “millionaire” during his tax speeches, then let’s keep things consistent.  By the time you are making $1 million a year, undoubtedly you will have a net worth of close to a million if not much more.  Even if you graduated from college and started earning $1 million a year, and saved 90% of your tax income, it would still take two years to have a million bucks in the bank.

The Democrats could EASILY pass a tax increase on those making $1 million a year.  Instead, they keep butting heads with Republicans and the general public by trying to push for tax increases on anybody making over $200,000.  This is just politics because it doesn’t matter whether taxes are increased on the top 10% or the top 1%, it’s still not enough to do anything to help our budget deficit.  A 50% tax rate on income over $1,000,000 from 35% would only raise $48 billion in revenue over the next decade according to the Tax Policy Center.  Remember, the S&P wants us to cut $4 trillion in that time frame!

Nobody will openly argue that raising taxes on someone making over $1,000,000 a year is not fair.  If they did, they would probably get publicly flogged.  I just don’t know why President Obama calls people who make $200,000 a year “rich” and “millionaires”.  Maybe you do.  Millionaires are those who either make $1 million a year or more, or who have a net worth in the multi-millions and still earn at the highest federal tax bracket of $380,000+ as far as I’m concerned.

LET’S FOLLOW BUFFET’S LEAD

If the Democrats want a taxation victory, a way to marginally help increase revenues, and ensure a Presidential victory in 2012, follow Warren Buffet’s suggestion and raise taxes on millionaires.  Don’t go after the hard-working doctors, professors, and business owners who make $200,000+ a year.  They aren’t the millionaires we refer to because the majority of them are likely not millionaires!

Thanks to Warren for knocking some sense into Washington DC.  I’m all for taxing millionaires more so that the rest of us can benefit.  Being able to vote to raise taxes on other people and not on ourselves to help ourselves is a beautiful thing.  Once we implement this tax compromise, we’ll get President Obama for four more years, I guarantee it!

Readers, why do you think President Obama is so hard up on raising taxes on those making over $200,000 when it does next to nothing in balancing the budget?  Why doesn’t President Obama understand that $200,000 is not a million dollars?

How long will it take for you to become a millionaire based on your after tax savings rate average and assumed investment rate of return?  If you are already a millionaire, what is your definition and how long did it take you to get there? 

Why didn’t Buffet just write a US$50 billion check to the Federal Government to help us instead of give it to the Bill & Melinda Gates Foundation?

Regards,

Sam

 

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    I don’t think Warren Buffett knocked any sense into anybody since I don’t think it will happen. Once politicians get an idea in their skull, it is there to stay. So, $200,000 + $200,000 will continue to equal $250,000 until new politicians are in place.

    Interesting math that it will take from 14 to 143 years. Almost makes you wonder if it is worth bothering. Oh well, I will still continue my quest as I am sure many others will also. I am not there yet, but should be within 7-10 more years.

    • says

      I think our politicians will listen, and I think Obama gets re-elected if he does pass legiation Yo raise income on $1 million and above. It will do nothing for our federal budget, but it will BR a victory.

      7-10 years from now is good! How long would that be total? More examples the better!

  2. David M says

    Let’s just raise taxes on EVERYONE!

    We are spending more and more on healthcare, Social Security (for the old and disabled) and debt each year. Since we are unwilling to do anything hold down the costs of these items – I think the only sensible thing to do is raise taxes on EVERYONE.

  3. says

    There you go with the tough questions, making my head hurt early in the morning… “Why doesn’t President Obama understand that $200,000 is not a million dollars?”. Um, for the same reason that shaving a mere couple of trillion from the federal budget over 10 years is not “living within our means”?

  4. says

    Nothing is stopping Buffett from contributing as much as he wants to in taxes, the government will happily take it.

    We are not millionaires. I guess the three kids, tuition, expenses paid for health premiums, property taxes, vehicles (because we have zero mass transit around Detroit), helping ailing parents, BS flood insurance, and more don’t come in to the equation. All that matters is what your gross income is apparently.

    Our savings will kick in soon as the house will be paid off and the kids get older and move out. Not sure when we will be come millionaires, a lot depends on the market. However, I do know I don’t want to give one more penny to the government because I am jaded and I wouldn’t trust them to manage a paper route, let alone my hard earned money.

    • David M says

      Absolutely he could. He alone contributing will do almost nothing. However, if hundreds of thousands of people that make millions of dollars year were FORCED to pay higher taxes, it would seriously impact the condition of the US circumstances.

      “All that matters is what your gross income is apparently.” – not true in my opinion – it is the net income over $200,000 or whatever number that people are talking about increasing taxes on.

      • says

        According to the Tax Policy Center, if we raise taxes from 35% to 50% for income over $1 million, we get an extra $48 billion in revenue over the next 10 years. That’s insignificant, as we are trying to cut $2-4 TRILLION.

        • David M says

          $48 billion here $48 billion there and next things you know your talking about real money!

          As I stated in my original post – I believe we should raise taxes on everyone! Or we need to do something regarding the rapidly growing costs of Social Security, Medicare, Medicaid and interest on the debt. Most American are AGAINST doing anything to cut the things I mentioned and thus I assume they are not going to happen – thus I think we need to raise taxes on everyone immediately. The longer we let this problem go on – the worse the problem becomes and it gets even harder to deal with.

        • says

          I think if the government got 48 billion, they would find a new way to spend it. I think instead of raising taxes on a select few, they should make everyone pay taxes, except the working poor.

          Before I am willing to pay one more dime, I want shackles placed on the governments hands so they can’t reach for the wallets and increase spending.

    • says

      Thanks for highlighting your example, which basically says it takes harder and longer than one thinks even at 200k+ a year in household income to become a millionaire.

      So you are saying you wouldn’t be happy paying $10,000, or an extra 5% a year in taxes to our fine government?

      • says

        I would be more willing to give the government my plasma than more money. Then at least something good would come of it. Although it would probably accidentally be spilled down the drain.

  5. The Genius says

    “Readers, why do you think President Obama is so hard up on raising taxes on those making over $200,000 when it does next to nothing in balancing the budget? ”

    Because this is about class warfare and trying to blame others, instead of fixing the problem which is to reduce spending and entitlements. All of us individually balance our own budgets and can’t have an unlimited amount of credit, neither should our country.

  6. Untemplater says

    These are some fascinating numbers Sam. It will be interesting to see if Obama gets reelected or not. I like Buffett’s proposal but I don’t ever see the democrats going for that. Bottom line nobody wants to pay more taxes and we need to give the middle class and nonmillionaires a boost so small businesses start hiring again.

  7. says

    I do applaud Mr. Buffett for using the common sense example of comparing his average tax rate versus those that his employees pay (you have to admit that it is a pretty compelling case study). I would like to see the difference closing all of the corporate loopholes would make before raising taxes. Has anyone seen any estimates on these? When you hear about these huge companies like GE that basically pay nothing in taxes, or the farm industry that is so heavily subsidized that it cancels out any tax they pay, it makes me wonder just how convoluted the whole tax code is.

    Oh and my guess is that he gave the money to the B & M Gates Foundation because they are much more efficient at spending it than the government is!

  8. says

    As I stated in my post, I don’t think we need to raise taxes. I think we need to make them more fair.

    Why does someone have to pay regular tax rates if they make money with their own small business, but if you make money by investing in a large publicly traded company, you pay lower taxes? Both people own businesses, so they should be taxed the same.

    Raising capital gains taxes would increase taxes on the rich, but it would really make it fair, which should be the objective here.

    • David m says

      Kevin,

      I agree 100 percennt!

      This was part of the1986 tax changes,unfortunately this only lasted a few years.

      Hopefully congress will try again!

  9. jennypenny says

    It’s not just income tax. If your cap gains tax was tied to your AGI, you could raise a lot of money that way also. i.e. AGI under 200K-15% cap gains, AGI up to 500K–20% cap gains, and so on. And payroll taxes should not be capped. We would pay more, but I would rather pay more into SSI (which benefits many friends and family) than give congress more of my money to waste. And establish a means test for SSI. It doesn’t have to be a one-time thing. Maybe you have too much money at 65 to qualify, but then get cancer and the treatment costs wipe you out. Make it something you can apply for again at any time. Those changes would be almost enough. That, and a 10% reduction in spending and we’d recover nicely.

    • says

      More spending is what we need not less. If everybody deleverages and stops spending, that’s when a recession occurs.

      Capping social security contribution is fine, b/c SS itself is capped for distribution.

  10. says

    Enjoyed the comparative (or reductive?) analysis. Do we know where they came up with the original $200k figure?

    And why haven’t they updated the marriage limits. Seems like it would promote more unions if each person’s earning potential was equally valued.

    Would think there are large differences between various income brackets (i.e. $25k vs $200k = $200k vs. $10m)

    • says

      I’m sure the $200K figure is from decades ago when $200K was deemed rich, and gasoline prices were $1/g and college tuition was 75% lower.

      Even our top marginal tax bracket starts around $370K. $200K is so arbitrary.

  11. says

    “Millionaires,” “top 1%,” “the wealthiest 1%.” I love all the keywords that politicians use to keep a debate simple. Simple language attracts simple minds, and simple minds are still plentiful enough to win an election.

    Income taxes were once struck down as unconstitutional. Actually, I think it was twice. Income is product of a corporate body. To collect income taxes on people assumes that anything above the poverty level is “profit” and decidedly the property of government. When you think about it like that, the difference between 25% and 30% shouldn’t matter–what about the principle of the argument?

    Even people who don’t earn income in the tax brackets that would be affected in this decision should consider the long-run costs of accepting binary higher revenue solutions. The income tax is a product of the year 1913, and it was accepted with the understanding that so few people would pay a significant amount of income taxes that it wouldn’t matter.

    In 1913, the first income tax bracket was 1% on all earnings above zero but less than $20,000. The highest tax bracket was 7%.

    It shouldn’t be much of a surprise that the rates have become ever higher. Fool me once, shame on me. Fool me twice, shame on the voting public.

    • says

      The “simple minds” problem is actually by far the biggest problem with Western-style democracy right now in my opinion. We love to blame the politicians, but they are just going with what they have been told will work. If people actually got engaged with policy (I consider this part of our democratic duty), then politicians could actually have REAL debates and try to work out the nuanced compromises that we all know have to be made.

  12. says

    I’m all for raising tax for millionaires, but I also think everybody should feel the pain as long as we are policing the world and are fighting two wars+. If you want a tax cut, then we should cut our world policing. The democrat should target those making $1M or more annually and they’ll have a better chance. I think if you’re making 200k/year, you should be able to become a millionaire in about 10-12 years by investing and taking advantage of tax saving vehicle like 401k. Even with the “flat market”, if you dollar cost average over the past 10 years, you’ll be in the black.

    • says

      What assumptions do you assume becoming a millionaire in just 10-12 years making 200k/year? I’d love to know.

      I honestly believe too many people who don’t make 200k just assume that it’s easy to do. In my examples above, it’s not that easy, even if one saves 50% of their after tax income year in and year out!

      • says

        I used your assumption, but invested in VTSMX instead.
        If someone invest $5,833 (70k/12) per month from Jan 1, 2000.
        That person will be a millionaire on Jan 1st 2011.
        Of course if he sell then he’ll have to pay capitol gain and
        have to wait a bit longer to have $1M cash.

        • says

          Is that what you will be doing Joe?

          I highly doubt it’s that easy, and that the majority of people will NOT consistently invest that much money month in and month out, even if they have it.

  13. Jonathan says

    As the great economist Milton Friedman said in response to taxing the rich:

    Woman: “That darn rich businessman with his millions of dollars. How is that fair?”

    Friedman: “What do you suppose that rich man does with his millions? Stuff it under his mattress?”

    Woman: “I supposed the greedy guy just invests it so he can get even more filthy rich!”

    Friedman: “When the rich man invests his money, where does it go? Does it not go to companies who build factories and supply jobs to those less fortunate?”

    Woman: “Oh…”

    If anything, we need to motivate the rich to invest/spend even more.

    In terms of the budget deficit, I think we all know that social security and medicare are unsustainable. There are people who have trouble getting by, and may think it unfair to cut these programs. BUT, let the rich man invest his money and give you a job!

    • says

      I like the Dilbert Cartoon guys suggestion… raise taxes on us, but allow us to use the HOV lane when we want, and have all people who collect social welfare benefits write a personal thank you letter to those paying for it.

  14. says

    $200,000 a year is enough to become an accredited investor. These investments are one of the easiest ways to become a millionaire, although they are risky if you do not know what you are doing. This isn’t to say that I agree to raise taxes on $200,000 for individuals and $250,000 for married couples. In fact, for a couple to be considered accredited investors $1,000,000 USD is required, or prove $300,000 a year. Obama is just completely clueless on how to handle the tax deficit. As of right now, and please someone correct me if I am wrong, the tax bracket for 35% in taxes are incomes of at least $372,000. What would be the point to move that tax bracket to $200,000? Last time I checked, that is less than $372,000 a year. Please someone correct me if I’m wrong on that one too :)

  15. says

    One reason Obama wants to start with $200K is because $48 billion is not enough! If taxes were raised on millionaires there would probably be a tax shortfall. People who earn that much have choices and will seek counsel to reduce the tax bill.
    It took me seven years to accomplish my goal of financial independence. I saved for 5-6 years to start investing in income property. I live very comfortably, but that is it. The word millionaire no longer has the meaning it once did. For me, I get to do what I want to do. I have choices! I think that is what money does for you.
    Buffett is smart that is why he gave it to the Gates Foundation. He knows it will be distributed better than the government and it is tax deductible.

      • says

        He is suggesting the rich pays more in taxes! Almost all of his earnings are capital gains and dividends that is why his taxes average 17%. He is suggesting raising the tax rate and he will still pay the same in taxes! I wonder if he would feel the same about taxes if the capital gains tax were the same as the tax brackets. In the interest of full disclosure, I this the upper brackets should pay incrementally more. Maybe the answer is a flat tax, however I do not have the confidence in our Congressmen to do this fairly.

  16. says

    Unless we get a flat tax on millionaires with no chance for deductions, their tax lawyers will find ways for them to pay no taxes anyway. Or very, very little. Obama & others know that so they have to go after those lower on the income scale. The lowest income earners pay no taxes & the upper income earners pay no taxes. Who is left but the middle class & upper middle class?

  17. Darwin's Money says

    Convenient for Buffett –
    – He’s lived most of his life out. With the past decade in a VERY low tax regime.
    – He has much more “wealth” and a comparatively low “income” which would be subject to the tax he’s proposing (not a tax on wealth, but income only)

    …and…no mention of cutting spending anywhere; just raising taxes.

  18. Mike Hunt says

    I think Obama should propose a 50% tax on all pensions over $50k a year, especially those that are funded from the government. After all, a $50k pension would be the equivalent of a $2.5 million portfolio (using the current 2% 10-year treasury rate)!

    It took me 11 years and 5 jobs from when I started working full time after university / grad school to hit the target.

    So it takes at least 10 years of working / saving / investing to get there…

    -Mike

  19. says

    I never understood the math either, 200K for single and 250K for couple… the porportions doesn’t even come close. It appears, the cost of living was not factored into this amount as well. I have heard that the COL in CA is rather high.

  20. says

    This is one thing, among others, that really pisses me off about Democrats. I have to remind folks all the time that taxing people who actually earn over $1 million a year aren’t going to get us where we need to go when it comes to the national debt.

    There are plenty of millionaires who don’t earn anywhere near $1 million a year. It’s possible a sizable percentage of their net worth is tied up in real estate, businesses and other illiquid assets they’ve accumulated over time.

    Are we going to tax them on earned income, realized gains, AND unrealized gains?

    Are we going to start charging a tax on wealth?

    The people who are paying the most unfair rate of income taxes are high income wage earners who don’t generate their income from dividends and long-term capital gains. They’re called business owners – many of them job creators.

    I’m of the opinion that Americans have been getting over like fat rats for far too long. Everyone needs to pay their fair share including the middle class. By the way, I don’t care how expensive it is to live in Boston, NYC, DC, SF, and LA, $200K a year is not middle class. I’m okay with poor people not paying any federal income taxes, but they certainly shouldn’t receive tax refunds that exceed what they’ve paid.

    Raising taxes on people who make over $1 million a year, like eliminating welfare programs for deadbeats, makes for good speeches, but it’s simply not enough.

  21. Patrick says

    At my current pace of saving almost $15,000 a year in my 401k it will take me 33 years with a 4% annual gain. Being 31 now means that when I am 64 I will over just over $1 million in savings.

    With the current rate of raising prices of basics like gas, milk and bread I figure that $1 million will still put me in the lower middle class when I retire.

  22. joe says

    Love the author’s calculations. Apparently the only definition of ‘wealth’ that (s)he wants to consider is investment income. Because we know that all those people earning over 250K throw some of it into investments and then flush the rest down the toilet. I mean I really can’t imagine those making over 250K to buy things like cars, boats, appliances, or *gasp*, houses. Yeah–investment income–yeah that’s all that matters.

    • says

      Exactly. If you make 250K, you are supposed to live like a 25 year old pauper to get to these number of years. In other words, it may very well take EVEN LONGER. I’m being conservative.

      • Patrick says

        Joe,

        If you have been following this blog for anytime at all you know that the author is
        an avid saver and believes in living below his means. Just because you make $250k
        doesn’t mean you have to spend every last dollar.

        For years I have lived on the same salary by putting every raise and cost of living
        adjustment into savings. In 2011 I have brought home less money each pay check
        even though I got a raise, my family cut our cell phone plan and cable bill and put that
        extra $100 towards maxing the 401k contribution. It’s about setting priorities.

  23. says

    While I agree that $200,000 isn’t a Million dollars (and any person should be able to see that)… I think our problem is with the tax system and the tax code.

    The reason that those who earn over 1 million pay less in taxes is because most of their income comes from investments which are taxed differently then earned income…

    Maybe we should just treat money as money and tax investments like income… if they aren’t in a Roth and you cash them out or take a distribution, you pay taxes on them like our income tax.

    • says

      I’m 100% for raising long term capital gains tax closer, if not equivalent to normal income tax rates. As you said, income is income! We need to stop discriminating.

      Although, one downside is probably more volatility with short-term traders.

  24. says

    Our combined income is barely into six figures… which is good for Canada I guess but probably peanuts in a place like SF. So, it will be a while before we’re millionaires. ;)

    As for long term capital gains, I disagree. Why should I be taxed twice? I was already taxed when I invested, and now you tax me again on inflationary gains? Those aren’t even real gains. What is this BS that only some income is “earned”. What, is the rest “unearned”? :P

  25. says

    I just wrote a post on this … I’m 27 now, and I think I can be a millionaire by the time I’m in my mid-to-late 50’s if I save $1,000 per month.

    But there’s another issue at hand: what about LLC’s and S-Corps that have ‘pass through’ taxes — in other words, small businesses whose taxes are assessed as an individual’s personal income?

    If an LLC or S-Corp wants to buy equipment, like a forklift, it can’t write off the whole expense the year it buys the forklift. It needs to “depreciate” that forklift over the span of several years.

    So let’s say an LLC earns $1 million. It pays $50,000 in salary to the owner, who is also the only employee who works at the LLC. It spends $50,000 on overhead, which it can write off as an expense, and another $800,000 on forklifts, cranes and other heavy construction equipment, which need to be depreciated over the next 7 years. The business is left with $0, but the owner has to pay taxes on $950,000 (minus 1/7th of $800K).

    That’s the big problem, I think, with raising taxes on the “wealthy” — it hurts small biz.

  26. says

    Well I’ve got to get to that $200k magic number first! ;) jk.. I think that based on our businesses and future growth potential, we could be millionaires by the time we are in our 40’s. Is it worth reaching towards? Sure.. its a nice goal to have. Saving money, investing, paying down the mortgage, keeping an emergency fund and staying out of debt along the way is pretty difficult but doable.

    I agree with Paula.. with our S-Corp we have to ‘depreciate’ the equipment we buy for the business over the span of a few years.. We do get some tax benefits from having the corp.. better than sole prop.

      • says

        You know I should find this out. 2 years ago I bought a computer and our CPA said it would be depreciated over the next few years. I think its based on a percentage of each year.

        Just bought a Mac a few months ago, so I’ll find out for sure this coming tax season.

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