In the book, The Millionaire Next Door, one of the lines that will always stand out to me is that how many of our friends and neighbors are secretly millionaires. This is because many of them have built up some sort of retirement savings plus they’ve gotten to the point where they’ve paid off almost all of their mortgage, if not the entire thing. The combination of their house and their savings are enough to push some people past the million dollar net worth line. While they might not live lavish lifestyles, they are technically millionaires! Today I will mathematically show you that becoming a millionaire by investing and saving is very possible in just 20 years!
Becoming a Millionaire by Investing
Some might say that 20 years is a long time! But let’s pretend that you just graduated at the age of 22 and started your first full time job. If you save for 20 years, there is a chance you could become a millionaire by investing by the age 42. This might not be retirement age yet depending on where you live. But if become am millionaire by 42, chances are, you’re well on your way towards early retirement. You could possibly retire by 50 at the latest by that time.
In the US, we have two types of popular accounts to save for retirement:
- A tax-deferred account, like a 401(K); and
- An Individual Retirement Account (IRA) which may or may not be tax-deferred.
These accounts both have limits as to how much money you can put into these accounts each year.
If you’re able to earn and save enough money so that you can max out the limits on these two accounts every year, then you may very likely become a millionaire by investing after 20 years.
Maxing Out Your Retirement Accounts Every Year
To illustrate, let’s pretend that you contribute the maximum limit to each of your retirement accounts every year. Additionally, we’re going to assume an average 8% growth rate in the stock market every year. This 8% comes from taking the average of the stock market returns over the last 100 years.
At the end of 20 years, your total combined accounts will be nearly a million.
As you can see, if you contribute into your retirement accounts for 20 years, it’s possible you can become a millionaire by investing. Of course this is very hard to do so. Maxing out your retirement accounts every year require a huge cut to your disposable income. So this inherently works better for those who are already making a high income. Additionally, it will be difficult if you are also planning for a wife, kids, marriage, and a house. This is very likely the case when you’re in your 20s.
Additionally, your 20s is when you probably want to have fun since you finally have a job and income.
Therefore, if you do end up pushing back your savings a little bit, it’s still possible to become a millionaire by investing before 30 years. Even if that happens, you can still retire well before your 60s if you are efficient with your money.