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 safely spend $40,000 a year (4% safe withdrawal rate) for 25 years until you’d likely run out of money. Goodness forbid you don’t face any exorbitant medical expenses either.
$40,000 a year is not bad for an individual or a couple with no debt. 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 safe. Post global pandemic, interest rates have plummeted. The 10-year bond yield is only around 1.1% while the Fed Funds rate is only at 0% – 0.25%. When you can get at most a 1% risk-free rate of return, withdrawing more than 2% or 3% starts getting aggressive.
Therefore, to be a real millionaire, you will net 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 is much more appropriate today with the real median household income at roughly $68,000.
In addition, we should all pray the government doesn’t raise the minimum Social Security age to something absurd like 80 years old. We should also pray the government doesn’t cut payouts drastically to strengthen the system.
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.
I think it’s interesting that the minimum wage used to be 4X the amount of one gallon of gas. Now the gap has fallen to only ~3X as the cost of goods have surged faster than wage inflation.
It’s important to grow your earnings faster than your costs, and increase that gap as wide as possible.
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. I had $100,000 in my mind because 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. In exchange I felt like an indentured servant for the first couple of years in Manhattan.
Every single VP and Partner at Goldman Sachs were millionaires. 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.
Sometime in my late 20s I crossed the one million net worth mark. But, I didn’t really know until I started religiously tracking my finances after the financial crisis hit at age 31-32.
I was already beginning to lose motivation working in finance after 10 years, and the fear of losing everything really kicked me into gear to start watching and actively managing my money.
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, but divorces and separations happen all the time. Be independent, so that no matter what happens, nobody can take away your financial freedom!
Please read The Average Net Worth For The Above Average Married Couple, especially if you are in a tenuous relationship.
Being a millionaire isn’t all that it’s cracked up to be anymore because there are roughly 14 million millionaires in America alone, or roughly 5% of the working population. To put 5% in context, the Asian population in America is roughly 5.6%, and you see Asian people everywhere!
Further, thanks to the Stealth Wealth movement, we know there is much more untraceable wealth out there that the government doesn’t know about.
Here’s a chart I put together with rough prices of goods and services today vs. in the past. You’ll notice there are a lot of significant increases, especially with tuition, real estate, and health care.
Current Prices vs. Historical Prices
The most absurd rises in costs above are college tuition, automobile, and housing prices. Unless you are already rich or receive a scholarship, I really don’t think it’s worth paying ~$50,000 in tuition alone to go to U. Penn or any of the Ivy Leagues for that matter. Education is free now thanks to the internet and you can utilize the cost savings to start a business, join a club for net working, or a host of other things.
$34,000 for the average automobile today vs. $68,000 for the median household income 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 it gives people a false sense of wealth, especially if they aren’t aggressively saving already.
Finally, housing costs in cities such as San Francisco and New York City are incredibly expensive in a nationwide context. I bought my condo in 2003 for $580,500, which so happened to be the median housing price in San Francisco at the time.
Back then, I thought $580,500 was relatively good value. But now Zillow says it’s worth $1,300,000, which no longer sounds like good value. The price would have to be less than $800,000 for me to replicate the value I felt in 2003.
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 clearly 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.
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 is not enough breathing room 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 New Millionaire Realty
Being a millionaire is nice, but it’s not what it used to be. If you want to be a real millionaire, shoot for at least a $3 million net worth.
With a $3 million net worth and no government support at age 65, you can now spend up to a more luxurious $120,000 a year. Plus if you follow my ideal withdrawal rate in retirement (never touch principal), then you will never run out of money.
Another thing to consider is how will you split your wealth. Ideally, it’s best to have a net worth of $3 million per adult in the household. In other words, if you have a spouse, it’s best to have at least a $6 million net worth. After all, both of you have expenses and want to b treated equally.
If you don’t make it to a $3 million net worth figure by retirement, don’t worry. Not everybody has the same chances of becoming a millionaire. A lot of luck is involved in building a great net worth. Remember, the estate tax threshold is a whopping $11.58 million per person today.
Life is still absolutely fantastic if you are not a millionaire. Think about how happy you were when you hardly had any money. We’ve got a large safety net from the government. There’s also an ongoing massive generational wealth transfer.
Finally, if our government and our parents screw us, then at least we’ve got peace in America and free internet!
Become A Millionaire With Real Estate
It’s hard to become a millionaire simply by saving your income. Income growth has simply not caught up to housing costs, college education costs, and health care costs. Therefore, in order to benefit from such rising costs, you should invest in real estate.
You should eventually own your primary home at the very least. The return on rent is always going to be negative 100%.
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.
My favorite real estate crowdfunding platform is Fundrise. They are one of the largest and oldest platforms having bee found in 2012. Fundrise smartly created private real estate funds to earn income 100% passively. 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.
Due to the rise of the work from home trend thanks to technology and the pandemic, there will likely be a multi-decade trend to lower cost areas of the country. CrowdStreet is also free to sign up and explore.
Investing in real estate since 2003 has made me a multi-millionaire. The combination of capital appreciation and rent appreciation can really boost wealth over time. It’s much better to ride the real estate inflation wave rather than pay ever-higher rents.
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.