The Late-Starting Millionaire

by Yank Elliott, MBA & IAHBE Staff Writer

 

My hope for this article is it will make some of you think about the distant future of your life. When we are young, we don’t often think about preparing for our later years. You are very lucky if your parents, or grandparents, are able to and think about beginning some kind of regular investment or saving plan for you. It’s very rare for anyone under 30 to consider building wealth for the future. Even those in the financial business often neglect the serious requirement to plan for their own financial future. This is a terrible mistake. They have the best advisors anyone could want but still don’t take advantage of what is available.

According to this article by Gauruv Mashruwala, Warren Buffett did as he was supposed to do. He purchased his first stock at the age of 11 and two years later announced to his family he would be a millionaire by age 30. This he did, but what a statement from someone only 13 years old! He had many other goals and the knowledge to propel him a lot farther from just a millionaire into the billions bracket. The way he started, however, is how it should be done.

There are several ways to become a millionaire; a few will work no matter how old you are. The very best way to acquire wealth is the old fashioned way, to inherit it. There is no way to plan for this; it is usually due to the accident of birth. Rarely does one inherit from non-relatives, but it requires no effort and no planning. Effort and planning becomes necessary only after receiving the wealth in whatever form.

And then there is the lottery, or any other form of gambling. The problem here is that it may become an addiction and you will almost certainly incur substantial losses. There are a few professional poker players and other professional gamblers who seem not to be affected by any of these problems, but most people should avoid these activities. If you want to support education with an occasional lottery ticket, go for it. Your winning chances are just as poor as everyone else’s.

Then, you could invent a product for a mass market that absolutely must have your product or service. Apple’s iPod and iPhone are two of this kind of product. Every entrepreneur hopes for this kind of success, but there aren’t too many Steven Jobses out there. You certainly should aspire to do these things, but don’t put off a plan to accumulate wealth for you and your family until you complete development and marketing of your new product.

Your home-based business may have been built on filling some important niche not served by many other businesses. This is one of the best ways to become self-employed according to most consultants who specialize in new business formation. The thought is if you find a significant need and fill it, you can get just about anything you want. This is true, but you may pay a price. If your business requires you to spend many hours looking after all the details of daily operation, you could jeopardize all the reasons you went into your own business to start with—things like more time for your family, less stress, and financial security. At some point you may come to consider the question, “Is it worth it?”

Now we come to the common denominator of wealth acquisition: SAVING. This will not be so difficult once you begin a regular plan and execute it for a few months. It does require eliminating some things that bring instant gratification. Our society is built on short attention spans and satisfying our every desire immediately. To deny these social pressures requires determination and developing and practicing a regular plan of action. You must give up something now in order to have in the future. The squirrel who waits until winter to gather nuts will never see another winter!

There are many ways to accumulate funds over years. You could invest in stocks as Warren Buffett did. There are also several kinds of IRA, 401(k) plans at work, and a host of other money-accumulation programs. We will only discuss straight savings here, but you should bear in mind that other forms can add to your savings nest egg. Your savings are insured to a limit of $100,000 in a bank belonging to the FDIC; when you go over that, start with another bank. When you get to your million dollars, you will need more than 10 banks, as we have seen from the recent events in the California area where several banks were closed by the Feds.

The secret of successful saving, after getting into a regular habit, is associated with compound interest. There are many savings calculators available, but the one we will use is MSN Savings calculator. To use this you must choose some interest rate you could reasonably expect to last over the time period when you will be saving. Some of the examples we will mention used pretty high rates; in the tremendous bull stock market we experienced for a few years, along with the rising housing market, some rates of 17% could have seemed reasonable at times. A much more conservative rate of 5 to 6%, however, will cause you to try and save more and will be more realistic in today’s economy. If rates should recover you will be much better off than you intended.

So how much money does the average American save? Liz Pulliam Weston, writing here, reports the following:

Nest egg savings for households in median US income group 2001:
Age 50’s $95,130
Age 60’s $83,400
Age 70’s $62,500

Home equity percent of net worth (median US households, 2001)
Age 50’s about 47%
Age 60’s about 50%
Age 70’s 64%

This means if people sell their homes when they get in these higher age groups, they might approximately double the money available to them, but then where would they live? Consider, at age 50, if you stopped working for some reason like sickness or job termination, you’ve got to make it at least 40 more years; with medical progress as we have had in recent years, some say people could live to be 150! But our 40 year span from age 50 means we would have to get along on $2,378 per year, maybe twice that if you sold your home. Could you do that? Even at age 70, with only about 20 years to go you would have just $3,125 per year. This is serious business!

When you begin saving at the proper time—when you are very young—the effects of inflation should be considered when setting your goals for wealth accumulation. If you just say, “I want a million dollars,” that’s just what you will get, but the money you have then will not buy as much as the money you placed in the fund during earlier years. Inflation has eaten part of your money’s value; do you still have enough to live on? There are calculators you can use to adjust for some assumed inflation rate. Here is a comparison showing how much difference inflation can have on what you must save each month. These figures are based on 8% interest (I previously said 5% or 6% is more conservative) simply for comparative purposes so I don’t have to do the math. Here’s what happens at age 60:

Begin at age 20 and save $286 per month at 8% you will have $1,000,000
Begin at age 30 and save $671 per month at 8% you will have $1,000,000
Begin at age 40 and save $1,698 per month at 8% you will have $1,000,000

Now, assume 3% inflation, and this is what you must do to maintain the same purchasing power:

Begin at age 20 and save $934 per month at 8% (+inflation) you will have $3,262,038
Begin at age 30 and save $1,629 per month at 8% (+inflation) you will have $2,427,262
Begin at age 40 and save $3,066 per month at 8% (+inflation) you will have $1,806,111

You can see the discipline needed to become a millionaire even without adjusting for inflation, but what if you have taken the easy way throughout your life and spent your money on instant gratification rather than future needs? My observation, after some years working with very wealthy people (eight years in banking), is that most affluent people were emotionally attached to the money, not to what it might do for them. Most of them just wanted to “feel” their money. It is obviously a demanding effort to save enough to accumulate a million dollars, so there has to be some emotion involved. But what if you have been emotionally involved with gratification all these years and suddenly you’re 55 with no money saved at all? That’s frightening. What to do?

First, you can forget the million. If you think you can maintain your current earnings until age 75 you will be able to support yourself through part of your “golden years” and maybe put away enough to go on a few years. At 5%, saving $1,000 per month for 20 years, you could accumulate $348,472. This should carry you, with Social Security, for enough years to see you through, but don’t try for 150 years!

That’s an ideal scenario; what if your company wants to get rid of older workers or it just goes out of business? Then what? What do you have left? First is Social Security which will soon be available to you. In this interesting article, Liz Pulliam Weston says a person earning the median US income of $37,198 will be able to replace a little over 41% of regular pay. You probably can get by on this, but not as well as you would like. There are some other things you can do, a few of which require a serious emotional commitment to achieve. Consider these actions you can take.
Look at the job you have now? How secure do you think it is, and for how long will it be available? If you are concerned about any of this, start looking immediately for another position, even if it’s not on quite the same level. Any job is better than no job. Another thing you can do is start a business on the side. The Internet makes this a viable idea in ways that haven’t always been available. Your own home-based business may just save you financially. Finally, don’t plan to retire at 65. Instant gratification has taken away this possibility. This may be a good thing. Many retirees go back into the work force anyway because of boredom. Besides, if you have nothing to do, your mental and physical health may quickly deteriorate It’s not so bad to keep working.

Look at your house. It may be the greatest thing in town, but you are about to run out of enough money to live on, much less maintain a fine home. Determine how much house you really need, sell what you have, and move into the smaller quarters that are adequate. Cutting back on housing expenses before retirement can add dollars to your wealth accumulation. While you are downsizing your home, consider moving to a less expensive area. I did this, and it is surprising how much less it takes to live; in my case living costs are less than one-quarter of what they were in my former location. It can make a big difference.

Something some people nearing retirement do, if they have one or two hundred thousand accumulated, is move to Mexico, or some other place that costs less than the US. There are many places in Mexico where you can live for 60% or less of the US cost. Several problems with this are: Medicare is not available; you may not know the language, you’ll have to make new friends, and there are unpredictable government regulations. Everything, including medical treatment, is generally cheaper there, so it may be possible to increase your monthly Social Security payment by eliminating Medicare. You can learn to speak Spanish. To prevent some government action that affects your money, keep as much as you can in US banks with FDIC insurance. This is one of those actions that require deep emotional involvement.

For thorough discussion of retiring in Mexico go here.

Saving for a million is a bit discouraging for young people just entering the world of work. I hope the information we’ve discussed will show how serious it can be to neglect saving something every month. Your parents may have worked during a time when employers had retirement plans; these are mostly non existent now. They have been replaced by 401(k) plans, a form of saving through investments. Participate in these to the fullest extent possible, but keep an eye on your plan because you are talking about some kind of stock investment. Most advisors say put aside 10% of your income each month. Assuming average US income about $38,000 annually you need to save, in some way, $3,800 per year which translates to $316 per month. This may seem like a lot to the new employee; DON’T DO NOTHING! Save what you can. $50 a month at 5% starting at age 18 will produce almost $58,000 at age 60; $100 will get you almost $116,000. You can always increase the amount you put in as your income grows.

Some things you can do throughout your life to increase what you have available to save:

1. Spend less than you make and save the extra amount.
2. Stay as near debt free as possible.

You will probably have a home mortgage on a home no larger than you need. If your family grows, trade up or build on when you need it. Don’t buy into the highest priced area; choose the least expensive area you can really enjoy. You also may have to finance your education which is a good investment because it will likely qualify you for a higher –paying career. Perhaps more important are the contacts you will make. Build these social relationships, because they will become your network which may include corporate executives, politicians, investors, and many others who may be able to help each other through life. Maintain this network of relationships.

If you aren’t saving anything, no matter your age, START A REGULAR PROGRAM RIGHT NOW, even if you are 55.

For a different perspective on becoming a millionaire, read my next article “Must You Be a Millionaire?”

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Yank is a home-based entrepreneur and freelance business writer living in Hurricane Alley, North Carolina, USA. His Website is http://www.alternate-choice.com and you may contact Yank at mailto:newideas@alternate-choice.com.