How to become a millionaire

I believe many Americans equate being a millionaire with being retirement ready.  That may be true for some, but most believe that it will take more than that for a comfortable retirement.  In fact, most Americans believe that the number for retirement is closer to $1.5 million.

According to UBS, approximately 19% of America has achieved millionaire status – that is 24 million out of 129 million households.  To qualify as a millionaire, net worth must equate to $1 million dollars – that is net asset value that excludes debt and includes the equity value of real estate holdings.

Being a liquid millionaire is a different equation.  This calculation extracts real estate holdings, so includes only cash and liquid investment holdings (equity and debt securities).  A different study by Henley & Partners identifies 20% of millionaires as representing liquid millionaires.  That essentially means they have $1 million of liquidity, which is not quite cash on hand (but can be converted as such relatively quickly).

Are you set for life if you are a liquid millionaire?  Maybe.

How do you build a portfolio that will qualify you as a millionaire?  You may be surprised that it is not get rich quick schemes, bitcoin investments or “all-in” scenarios represented by opportunistic moments.  Among millionaire Americans, this is generally tied to the discipline of making regular contributions into an employer sponsored savings account over a long period of time.  It isn’t flashy, but it is an effective strategy for reaching millionaire status.

Based on recent data, among Fidelity customers who have a 401(k) balance of at least $1 million, the average period contributing to an employer’s plan is 25 years and the average savings rate is 17.6%, which totals 26.2% when employer contributions are added in.

I did not start saving until my 30s, which a report by moneywise identifies as a critical point in creating savings momentum.  Without question 30-year-olds are at a challenging point in their careers because they are likely investing heavily in a home and/or starting a family.  But it can also be an inflection point in creating positive momentum by regularly setting aside a portion of income as savings.

As your income grows, and if you hold the percentage of this income contributed to savings at a constant, an acceleration of the contributions will grow exponentially.  If you can increase that contribution as a percentage in line with the raises in income, that will be even more effective in creating wealth.

In my savings plan from age 30 to 50, I was very diligent in contributing at least 15% and up to 20% of my salary to a company sponsored savings plan.  You will ask is that a percentage of ‘gross’ salary or ‘net’ salary (after tax) and I will say “Yes”.  The question is complicated by the fact that I had access to pre-tax and after-tax contributions to savings options in my company benefits plan. There were also contributions to my company-sponsored 401K that were matched by my employer (pre-tax).

So, a strong recommendation based on the data is to leverage employer-sponsored savings programs as early as possible to create your nest egg.  That includes stock purchase programs if you believe your company’s growth potential to be sound (but do not limit your contributions exclusively to company stock as we learned from the unravelling of Enron).

Regardless of how you build your wealth, by starting your savings plan in your 30s, you have the luxury of several of decades to contribute to your nest egg.  T.Rowe Price suggests having saved the equivalent of one-years’ salary as a minimum by this point.  By the time you have reached your 50s, your savings should have reached 3.5 to 5.5 times your annual salary.

Once you reach your 60s, the survey results from T.Rowe Price suggest that savings should have reached 7.5 to 13.5 times the annual salary, which is a wide spread.  Obviously, your retirement needs within this spread will depend on when you retire, where you live, your projected life expectancy (unknown) and expected annual expenditures.

Good Luck!