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.
Related: $3 Million Is The New $1 Million
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!
RESOURCES FOR A BETTER LIFE
Manage Your Finances In One Place: The best way to build wealth is to get a handle on your finances 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. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where I’m spending my money.
The best feature is their 401K Fee Analyzer which is saving me over $1,000+ a year in portfolio fees I didn’t know I was paying. The future is never going to be certain. But at the very least, we can stay on top of our money so we’re prepared for whatever comes at us. Personal Capital only takes a minute to sign up and it’s free. No other tool has helped me reach financial independence more than Personal Capital
Negotiate A Severance Package: Never quit your job, get laid off instead if you want to move on. Negotiating a severance package provided me with six years worth of living expenses to help me focus on my online media business. Check out my book, How To Engineer Your Layoff: Make A Small Fortune By Saying Good-bye. The book provides solid strategies for how you too, can escape a job you hate with money in your pocket.
Updated for 2020 and beyond. I forgot to mention I became a millionaire at 28 and a decamillionaire by age 40.