Although being a millionaire sounds nice, it’s not that impressive anymore thanks to inflation. In order to be a real millionaire, you will need to have a net worth of at least $3 million, not $1 million.
If you retired today at 65 with $1 million, you may be able to spend $40,000 a year (4% withdrawal rate) for 25 years. But you might also run out of money before you die as well. In a low interest rate environment, it’s only natural to expect lower risk-adjusted returns. After all, the risk-free rate is under 2% today.
Back in the 1990s or earlier, when the risk-free rate was closer to 5%, achieving a $1 million net worth was fantastic. Almost everything was cheaper back then. Can you imagine being able to go back in time and buy real estate at those prices? Or how about being able to pay college tuition prices from the 1980s? If you had a $1 million net worth back then, you were pretty much set for life! Further, think how much your $1 million would be worth now.
Today, if you are a $1 million millionaire, you should still feel good. However, it’s not like you’re popping Crystal in the hot tub on your luxury yacht in the South of France – not that that’s what everybody wants to do of course.
Why $3 Million Is The New $1 Million
The reality is, withdrawing at a 4% rate is no longer recommended. Post global pandemic, interest rates have plummeted. When you can get at most a ~1.6% risk-free rate of return, withdrawing much more than 3% starts getting aggressive if you want to rest easy at night.
Therefore, to be a real millionaire, you will need much more than $1 million. With $3 million, you can withdraw at a more appropriate 2% or 3% and generate $60,000 – $90,000 a year. $60,000 – $90,000 a year still isn’t living a rich lifestyle. But it’s inline with the real median household income of roughly $68,000.
In addition, we should all pray the government doesn’t raise the minimum Social Security age to something absurd like 70+ years old to make the system whole. The average American should also pray the government doesn’t drastically cut payouts.
If our prayers aren’t answered, let’s hope our 401(k)s and IRAs don’t get taxed out the wazoo come distribution time. If our hopes for a well-managed government are crushed, then surely we’ll have developed multiple income streams by retirement so no one event can get us down!
Inflation Really Makes Having Millions More Necessary
When I was working at McDonald’s for $4.00 an hour in 1994, I filled up my 1987 Toyota Corolla FX16 babe-mobile for $1 a gallon. I distinctly remember not being excited about making $4.00 an hour.
However, I had to do it because my parents didn’t give me much spending money. Besides, I wanted to do more than treat the ladies to free apple pies and Mcflurries.
The minimum wage in America is now between $8 – $15 an hour. Meanwhile, a gallon of gas is anywhere from $3.3 – $4.2 a gallon depending on where and what type you get.
It’s interesting the minimum wage used to be 4X the amount of one gallon of gas ($4 vs. $1). Now the gap has fallen to only ~3X as the cost of goods has surged faster than wage inflation.
It’s important to grow your earnings faster than your costs. Increase that gap as wide as possible. If you haven’t asked for a raise in more than one year, it’s time to get that hike. In addition, it is important to own real assets like real estate to ride the inflation wave.
With the world coming out of a pandemic slump, inflation expectations are increasing. The combination of a very accommodative Fed, a new government eager to pump stimulus into the economy, and pent-up demand should cause prices to increase.
Dreams Of Becoming A Real Millionaire
The most I ever thought I’d make after graduating from my public university, The College of William & Mary, was $100,000. That’s how much a senior foreign service official was making back in the late 1990s. I respected my father’s work and used him as a barometer for success.
I thought I’d start off at $30,000 and work my way up to that elusive six-figure mark by the time I was 60. If I diligently saved at least 20% of my income and invested wisely, reaching the magical $1 million figure would be achieved.
But instead of going into the public sector, I joined a bulge bracket Wall Street firm that paid handsomely. Actually, it didn’t for the first year with a base salary of $40,000 in expensive New York City. In exchange for the potential to make six-figures one day, I worked like an indentured servant.
Every single MD at Goldman Sachs was a millionaire. I quickly became accustomed to the fact that I’d join their ranks if I stayed the course. Going public in 1999 was a cataclysmic event of wealth for everyone at the firm.
No Relief Hitting The Million Dollar Mark
In my late 20s I crossed the one million net worth mark. But, I didn’t really know it until I started religiously tracking my finances after the financial crisis hit at age 31.
After 10 years working in finance, I was already beginning to lose motivation. I started regularly dreaming of doing something else, but I had not yet started my X-Factor. Therefore, I felt trapped. All I could do was take the punishment and keep on going.
Did I feel rich as a low single-digit millionaire in 2008? Not really. Even with no kids and a new spouse, I had a big mortgage and an unstable job. Further, I was thinking about a future in San Francisco or Honolulu with kids.
As the economy began to crumble, I felt like I was about to lose everything thanks to leverage. Luckily, I “only” lost about 32% of my net worth before the economy finally found a solid footing.
Focus On Your Millionaire Journey
I encourage people to develop individual financial wealth. Yes, it’s nice to grow your wealth together with your partner. However, divorces happen all the time. Be independent, so that no matter what happens, nobody can take away your financial freedom!
At the same time, it’s often easier building wealth as a couple. Therefore, I suggest you read my post, The Average Net worth For The Above Average Couple. The post will give you some rational targets to shoot for.
There are about 15 million millionaire households in America or about 4.6% of the total population or 9.7% of the working population. To put these percentages into context, the Asian population in America is roughly 5.8%, and you see Asian people everywhere!
Further, thanks to the Stealth Wealth Movement, there is more untraceable wealth the government doesn’t know about. After the boom in risk assets since the pandemic began, surely there will be even more millionaires once the Sentinels tally the results a year from now.
I fully expect the vast majority of Financial Samurai readers under 40 to be millionaires by their 60s. If you are fortunate to have a job for so long, accumulating a million dollars in your 401k or rollover IRA alone by 60 should be the reality for most.
Current Prices vs. Historical Prices
Here’s a chart I put together with rough prices of goods and services today vs. in the past.
The most absurd rises in costs are college tuition, automobile, and housing prices.
Unless you are already rich or receive a scholarship, I don’t think it’s worth paying $58,500 in tuition to attend AOC’s alma mater or similar private universities. Education is free now thanks to the internet. Go to a public school and use those savings to start a business or invest instead.
$39,000 for the average automobile price today vs. $68,000 for the median household income is also an interesting comparison. It shows why it’s so easy for the typical person to get into so much financial trouble. Sure, financing and leasing makes cars more affordable. But borrowing money gives people a false sense of wealth, especially if they aren’t aggressively saving already.
Finally, housing continues to be the most expensive cost for most people. Therefore, it makes sense for most people to get neutral housing by owning their own primary residence. Once you see yourself living somewhere for 5+ years, I would buy real estate following my 30/30/3 rule.
After studying the above chart, if you want to build wealth, you should be more motivated to go long housing, healthcare stocks, food and beverage stocks, commodities, farmland, and education.
If you can’t beat inflation, invest in inflation. Inflation is simply too powerful a force to combat long term.
Why You May Need Millions To Retire Comfortably
Here’s a chart I put together of a real family of three just getting by on $300,000 a year. This family has over a $5 million net worth and is living a relatively middle class lifestyle. $5 million is a lot of money. However, with interest rates so low, it’s hard to generate enough risk-adjusted cash flow to pay for all your living expenses in an expensive metropolitan area.
The reality is, to generate $300,000 a year from your invested capital would take at least $7,500,000 at a 4% rate of return. Therefore, having a $5 million net worth may not be enough to retire early with kids in a big city.
The family could take on more risk to try and get higher returns. However, when you’ve already won the game, you tend to stop playing as aggressively. The best move is probably for the family to relocate to a lower-cost area of the country. The only problem with this move is leaving behind a network of friends and family.
The New Millionaire Realty
Being a millionaire is nice, but it’s not what it used to be. Inflation is like a sneaky cat that steals all your food when you’re not looking. If you want to be a real millionaire, shoot for at least a $3 million net worth. Aim to hit the net worth targets in my average net worth for the above average person post.
With a $3 million net worth and no government support at age 65, you can spend a comfortable $60,000 – $90,000 a year without fear of running out of money. You can probably go nuts and spend up to $150,000 a year for several years to really live it up.
Remember, we’re trying to replicate in today’s dollars the type of lifestyle a $1 million net worth would have provided 30+ years ago. Not only are we looking to mimic the lifestyle, we’re also trying to mimic a person’s financial state of mind. After all, one of the main purposes of having lots of money is so you can worry less about money.
At least shoot for having $1 million in investable assets excluding the value of your primary residence. Once you have your housing squared away and all your debt paid off, you don’t need a six-figure retirement income to live a great life.
Life Should Still Be Good With Less
If you don’t reach a $3 million net worth figure by retirement, don’t worry! Depending on your tastes, needs, and where you live, you won’t need $3 million. Besides, not everybody has the same chances of becoming a millionaire. A lot of luck is involved in building outsized wealth.
Further, Social Security should be there for most of us by our mid-60s. With the average Social Security payment of roughly $1,543 a month, we’re talking an extra $18,516 a year in income. For those who retire at full retirement age, the maximum Social Security benefit is $3,148 a month or $37,776 a year. $37,776 a year is like having $1.26 million at a 3% withdrawal rate.
Therefore, even if you don’t retire a real millionaire thanks to inflation, life is still pretty good. Think about how happy you were when you hardly had any money. Today, our social safety net is growing. There’s also an ongoing massive generational wealth transfer that will make plenty of heirs rich without having to do anything.
Finally, if our government and our parents screw us, then at least we’ve got peace in America and free internet! With so many big media sites going behind paywalls, how cool is it that Financial Samurai still remains free? For the people surfing the internet at public libraries, I always think of you when writing my articles.
Best of luck on your millionaire journey. As you go about building your wealth, don’t forget to also focus on your health. There’s no use being a multi-millionaire if you don’t feel good physically and mentally every day.
Become A Millionaire Owning Real Assets
It’s hard to become a millionaire simply through savings. Further, income growth has not kept up with housing costs, college education costs, and health care costs. Therefore, in order to benefit from such rising costs, you should probably invest in these assets.
After you get neutral housing inflation by owning your primary residence, you can invest in real estate through ETFs, REITs, and rental properties. One of my favorite way to invest in real estate is through real estate crowdfunding. I’ve invested $810,000 in real estate across the heartland of America to take advantage of faster growth and potentially higher returns.
Inflation acts as a tailwind for property prices. Meanwhile, inflation whittles down the real cost of debt. This one-two combination can create tremendous wealth over time.
My favorite real estate crowdfunding platform is Fundrise. They are one of the largest and oldest platforms, founded in 2012. Fundrise smartly created private eREITs to earn income 100% passively. For most people, investing in a diversified eREIT for real estate exposure is the most appropriate way to go. Fundrise is free to sign up and explore.
If you are an accredited investor, take a look at CrowdStreet. CrowdStreet enables you to invest in individual commercial real estate deals mostly in 18-hour cities. 18-hour cities are faster growing cities with lower valuations and higher cap rates. If you have a lot of capital, you can build your own best-of-the-best real estate fund.
Manage Your Finances In One Place
All millionaires diligently track their finances. Do the same by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money.
The best feature is their Portfolio Fee Analyzer, which runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was hemorrhaging!
There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.
Readers, what do you think constitutes a real millionaire nowadays? Why do you think some people are still stuck on a $1 million net worth providing the same lifestyle from decades ago? Are we so slow to change our way of thinking? Or is inflation too sneaky of a cat to notice as it creeps up on us?