Retire Early as a Multi-millionaire on a Median Income

With this simple approach anyone earning the median income could become a millionaire within 16 years and retire extremely comfortably within another 12 years. You could be living off of returns that easily generate $365K per year.

If only I knew then what I know now…

I would be retired already. And not because I played the winning lottery number, or bet correctly on a long-shot sporting event, or bought amazing growth stocks in their infancy, or mined cryptocurrencies before they had real value. No miracles or schemes, just by following the common sense advice of billionaire Warren Buffet. I’ll still get there, just later than others because the pieces weren’t all in place earlier. 

So, this strategy is really for anyone with 25 years or more left before retirement. If you’re closer to retirement than that, you can still take some advantage, just not the maximum benefit. Consider applying or passing this information along to your children, grandchildren, godchildren, nieces, nephews, or neighbors. If someone were to start at the age of 18 (or earlier), it’s possible they could retire very comfortably by the age of 45.

Teach your children well…

My parents always said to save 10% of whatever I earn for a rainy day. However, they didn’t say what constituted a rainy day. Or exactly where to save the money. Nonetheless, this was a discipline that I did manage pretty well compared to most of my peers. In retrospect, it was not nearly as high as I should’ve allotted for savings and definitely not in the right growth rate accounts.

The presumption for most early earners is to set aside some portion of income into a savings or money market account that would earn a nominal amount of interest. Or if you have enough saved up, move that into a slightly higher earning certificate of deposit (CD). Unfortunately, most of those savings vehicles will not get you rich and won’t even earn at rate to keep up with inflation. Yet, that’s what most people do because it’s simple and stable. And, frankly, it’s better than doing nothing at all.

Time and compound interest are your friends…

There are some pretty simple ways to increase your rate of return, which will be outlined in detail later. But first, you need a plan to start saving and do so as soon as possible to take advantage of time and the compounding rate of return on your savings. It is all very achievable based on median incomes, budgets, and returns. 

Live with your parents – save 50% of your earnings…

The biggest expenses when you move out of the home are the costs of housing, transportation, food, healthcare/insurance, and apparel. If you’re living at home many of those expenses are covered by your parents or at least defrayed by them up to a certain age. The only spending money typically needed early on is for entertainment, personal items, and gifts. Take advantage of the extra savings opportunity provided to you – don’t waste it. Parents can even help encourage this while you are a minor to ensure you stick to it. 

https://www.bls.gov/opub/reports/consumer-expenditures/2019/home.htm

Let’s say you deposit 50% of what you earn before the age of 18 into a savings account. This includes cash, checks, or gift cards for birthdays, graduations, holidays, etc. It should also come from odd jobs, chores, allowances, baby/pet/house sitting, and actual hourly pay. Selling off toys, games, media, collectibles, and clothes which you no longer need or use is another great way to supplement your savings. That can add up to $29K in savings before graduating high school (see table below). 

Ages 1-17	Annual gifts received:	$150 cash value of gifts x 17 years x 50% =	$1,275
Ages 10-13	Chores/sitting/odd jobs:	$20 per week x 50 weeks x 4 years x 50% =	$2,000
Ages 14-15	Minimum wage job:	$7.25/hour x 18 hrs/wk x 50 wks x 2 yrs x 50% =	$6,525
Ages 16-17	Median retail wage:	$13/hour x 30 hrs/wk x 50 wks x 2 yrs x 50% =	$19,500
	Total:		$29,300

That saved money can serve as your emergency fund for really dire situations. And that doesn’t mean buying beer and pizza. We’re talking about some actual emergency, like medical service expenses, or damages from an accident, or to cover living expenses if you’re unemployed later in your career. The hope is you’ll never have to use these funds at all, but best to have it should you ever need it.   

Alternatively, you could use these savings for continuing education after high school, such as trade skills training, a certification program, or an undergraduate degree. Taking 2-4 years in your late teens or early twenties to hone your craft will really pay dividends in the long-run (more on that a bit later). To make the most of these savings as a minor, your parents or custodian should set up a 529 plan on your behalf. This offers some tax advantages for them and security for you. And will touch more on this again later.  

Live at home as long as possible…

If you and your guardian(s) can bear it, stay home until you’re 25 years old. Well, the first 17 years are essentially mandatory. That means if you endure an extra 7 years, you’ll boost your savings significantly. The longer that you stay home, the longer you can take advantage of saving 50% of your income. Even if you can only hold out until you’re 21, then get responsible roommates to split up the burden of the costs of everything (rent, utilities, cleaning, food, transportation, etc.).

Save 20% of your income at all times…

This is double what I was taught as I grew up. However, it is entirely possible if you follow reasonable budget practices, like the 50/30/20 budget planning noted in the article below. As soon as you move out of the home where you grew up, you’ll have to reduce the rate of saving from 50% to 20% of your income in order to afford those essential living items that were covered by parental units.   

https://www.nerdwallet.com/article/finance/how-to-budget

It’s important to note that this budgeting is attainable with median income AND median expenditures, but very challenging if you seek high end brands, status symbols, flashy trends, and the latest technology. If you “must” buy name brands, then at least get them discounted by 50% or more via clearance or as second hand purchases. But you should consider postponing those luxury purchases so that you will have bragging rights when you retire in your mid 40s and have money to travel the world, take care of your family, or do most anything you’d like. 

https://www.forbes.com/advisor/retirement/how-much-to-save-for-retirement/

Retire early with $7.3 Million…

Firstly, why did I choose $7.3M as the target savings for retirement? Because most people would be happy with $1,000 per day for life, or $365K per year. This yearly amount is based on the assumption that during retirement your savings will have an average annual return rate of 5%, as shown in the formula here: 

$7,305,000 savings x 5% average rate of return = $365,250 annually or $1,000 per day for life

Since you will only be living off of the gains, the balance remains untouched, and you’ll have perpetual funds beyond your lifetime. That seems pretty ideal, doesn’t it? In 2018, that amount of income would put you in the top 5% of earners in the USA. 

https://www.investopedia.com/personal-finance/how-much-income-puts-you-top-1-5-10/

It’s a simple strategy, really…

Relying on the advice from the “Oracle of Omaha” billionaire, Warren Buffet, invest 90% of savings in a stock index fund with very low fees and the remaining amount in short-term government bonds. For more information supporting that topic, see the article linked below or research other resources on Mr. Buffet. As you will see, this investment plan is not as daunting as it may sound.

https://grow.acorns.com/warren-buffett-investing-advice/

Invest in low-fee stock index funds…

There are a number of ways you can do this, but let’s discuss what a stock index fund is first. Most people have heard of indexes like Dow Jones Industrial Average (ticker symbol: ^DJI) or the Nasdaq Composite (ticker symbol: ^IXIC) which consist of a cross section of stocks available for public trade to indicate what is happening in the stock market. Each index is weighted a little differently to reflect different sectors of the economy, like technology, or consumer staples, or manufacturing, etc. 

The stock index that we’re interested in here is the S&P 500 (ticker symbol: ^SPX). The reason for this is because there are many ways to invest in this index, the returns are higher than most managed funds, and there is very little expense associated with these funds, especially compared to managed funds. This index is made up of 500 of the largest publicly-traded companies from the USA and represents stocks most people usually want to own. 

https://www.fool.com/investing/stock-market/indexes/sp-500/

The S&P 500 is susceptible to gains and losses just as any other stock or index. However, since the inception of this index there has never been a 25 year period where the average total returns have been negative. In fact, the lowest compound annual growth rate (CAGR) in any 25 year period has been just under 6% (from 1929 to 1953), during the Great Depression. The highest CAGR in any 25 year period (from 1975 to 1999) has been well over 17%, or nearly 3x higher than the depression era rate.  

https://www.slickcharts.com/sp500/returns

Leveraging the S&P 500 index is the primary strategy here. With a 25 year median CAGR return over 10% it’s hard to find a simpler, less costly, and higher performing option for investing. The key is not to panic when the market starts declining, because it will from time to time, instead hold steady to the shares you own if you can. Just as importantly, continue to buy as the market is in decline, so that when it rebounds you’re able to take advantage of the spike in growth. Think of the declines as though the index is on sale or temporarily discounted.

Getting started…

There are a number of ways to put money to work in the S&P 500 index. The 3 most common ways are through an education savings plan (529 plan), a retirement plan (401k plan, traditional or Roth IRA), and exchange traded funds (ETF). Each option has particular benefits and limitations. More information is available on each of these types of investments from a variety of sites, but some are provided here for your convenience:

https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan

https://www.forbes.com/advisor/retirement/best-retirement-plans/

https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-2

In general, it’s best to maximize your employer’s retirement plan offering. You can typically setup a contribution amount or rate from your paychecks so that you’re adding a bit to the plan with every pay period and the rest of your check can go towards your regular expenses. The advantage of contributing to the employer plan is that you can “set it and forget it” and many employers will provide some level of matching to the money you put into the plan. That’s free money toward your savings goal! 

If your company or business doesn’t offer a 401k or you’ve hit the limit you can contribute to an IRA, then consider a no commission ETF account. There are several reputable firms that offer these services online or via apps on your smartphone with no minimum requirements and no commission fees to purchase and sell ETFs.

https://www.nerdwallet.com/best/investing/brokers-etf-investing

Regardless of which investment type or types you choose to leverage, there is almost always an option that is index based and specifically tied to the S&P 500 results. The article below summarizes some of top performers and key metrics about the more familiar funds that track the S&P 500:

https://www.investopedia.com/articles/markets/101415/4-best-sp-500-index-funds.asp

Scenarios at work…

Let’s consider various scenarios using some basic parameters and see how they might perform. The basic parameters are when you start earning, what rate you’re saving, whether you go it alone or with a spouse, and how much you earn. However, we’re going to limit the scenarios to just 5 examples based on the most common factors. 

One of those factors is the median wage of employees in the US, which is $20.17 per hour or approximately $42k per year. This figure comes from the US Bureau of Labor Statistics.

https://www.bls.gov/oes/current/oes_nat.htm

Prior to the age of 22, the following jobs and wages are common. The figures shown in the “Potential Income for Minors” table in this article were based on these wages and will be used again for the early earning years of the scenarios. 

$7.25/hr Federal minimum wage

$11.57/hr food and beverage servers

$12.03/hr cashiers

$13.02/hr retail sales

Although $20.17/hr is the median overall wage, consider that with a bit of training these 10 popular professions earn more than the median and would accelerate your opportunity to retire sooner. 

$21.39/hr health technicians

$22.26/hr maintenance workers

$22.37/hr mechanics

$22.83/hr construction tradesmen

$22.83/hr counselors and social workers

$23.85/hr art and design workers

$24.45/hr librarians

$27.36/hr electricians

$27.77/hr sales representatives

$28.53/hr law enforcement workers

Scenario 1. Single earner, who is an early starter has been saving since 14 years old, living at home until 25 years old, earning $13.02/hr until 22 years old, and then $20.17/hr thereafter. Also, has been saving at a rate of 50% while living at home and 20% when out on their own.

In this scenario with maximum returns, it’s possible to achieve $1M in savings by age 31 and target retirement savings by 43 years old. With median returns one could build $1M in savings by 37 and target retirement savings by 56.

Scenario 2. Single earner, late starter that began saving at age 22, living at home until 25 years old, earning $20.17/hr. Saving 50% while living at home and 20% when out on their own.

In scenario 2 with maximum returns, it’s possible to achieve $1M in savings by age 37 and target retirement savings by 49.5 years old. With median returns one could build $1M in savings by 44 and target retirement savings by 62.5.

Scenario 3. The same as Scenario 1, except that at age 25 moving out of the house is because of marriage and having 2 median income earners at $20.17/hr each. Saving 50% while solo and living at home and then 20% when married and out on their own.

In scenario 3 with maximum returns, it’s possible to achieve $1M in savings by age 31 and target retirement savings by 42.5 years old. With median returns one could build $1M in savings by 35 and target retirement savings by 53.5.

Scenario 4. The same as Scenario 3, except the married couple doesn’t start saving until age 25 with 2 median income earners at $20.17/hr each. Saving 20% each once they are living together.

In scenario 4 with maximum returns, it’s possible to achieve $1M in savings by age 39 and target retirement savings by 51 years old. With median returns one could build $1M in savings by 44 and target retirement savings by 62.

Scenario 5. This scenario is based on blended median household income of $33.03/hr and shows how many years it would take to get to target retirement savings. This assumes 20% savings at all times.

https://www.census.gov/content/dam/Census/library/visualizations/2020/demo/p60-270/figure1.pdf

In scenario 5 with maximum returns, it’s possible to achieve $1M in savings in 16 years and target retirement savings in 28 years. With median returns one could build $1M in savings in 22 years and target retirement savings in 40 years.

Things of note…

You’ll notice that these results do not reflect increases in wages that you’d likely see over the 25+ years of earning. That would be a plus and contribute more toward savings and compounded returns. However, it also does not reflect inflation rates, or the weakened value of the dollar over time, which is a minus. This simply presumes that those 2 factors will essentially offset, to keep the view into the approach easier to understand. If your wage increases should grow slightly faster than the inflation rate, then you would hit your target savings earlier than depicted in the charts.

These results reflect all figures in terms of pre-tax dollars. Again, this is to keep things simple for depiction and because there are several variables that factor into tax rates on your earnings. For example, state income tax rates may or may not apply to you depending upon where you live or work and how much you earn. You may also have some limits on what investment vehicles are available to you through your employer or the financial institutions you select. Further, a tax advisor or financial planner may recommend particular strategies to shelter you from further tax burdens. Consider consulting with one every so often to take advantage of the latest tax laws.

Also note that none of these figures include any other perks, pensions, or social security benefits that you might be eligible to receive in retirement. Those programs would be incremental dollars to your income when they kick in. While those would be pluses for you, the math used here doesn’t rely upon them.  

You’re ready to retire, now what…?

Seek a tax consultant and CPA, if you haven’t already done so. They may provide advice to you to minimize your tax burdens and maximize your payout benefits.   

Once you achieve your target retirement savings goal, then consider shifting your dollars into more modest, but stable options for growth. One of the simplest ways to do this is to allocate your savings into age based funds, which get more conservative with your savings investment dollars over time. 

Even if it’s too late for you to leverage this approach fully, consider that if you have your children or grandchildren put these tactics into play that they will be able to take care of you in your late age and your modest retirement income.

Please keep in mind there are always risks with any investments, and past performance is no guarantee of future results. I’m not a certified financial planner, accountant, securities broker, tax consultant, legal advisor, real estate agent, insurance salesperson, bank officer, or anything else related to finance. I’m just showing that the historical evidence is there to support this concept and the math works out. And that it seems to be working for me now that I’ve applied it to my retirement strategy. Please feel free to check with your own tax and financial advisors to see if they have more fiscally sound advice to offer.

Looking forward to your comments…