How to become a millionaire on entry level developer pay

I am a believer that anyone can become a millionaire. However, whomever is pursing the goal of having a million dollars net worth needs to be smart about how they utilize their income. To put it simply, they need to be smart enough to make a plan for their money and follow through with their plan. The plan must not include extravagant expenditures like luxury cruises, or very expensive automobiles. Expenditures is a topic for another time. In this post we are going to discus how someone making around entry level pay for a Software Developer and saving a small amount of their pay can eventually become a millionaire, and have a comfortable retirement.

In order to become a millionaire, first we must know what we are targeting.

1. What is a Millionaire?

When you ask for a definition of Millionaire, most will give you the answer that sounds a lot like an income of over a million dollars a year. When you ask for examples of millionaires you are given examples of people such as Bill Gates, Mark Zuckerberg, Elon Musk, etc. Those individuals do have very large incomes. Income actually is not an indicator of being a millionaire.

Lets look at the definition of Millionaire from Merriam, They define millionaire as:

a person whose wealth is estimated at a million or more (as of dollars or pounds)

Ok what a great definition, but what is wealth? is that income again? No actually, lets again look to Merriam for the definition of Wealth

• abundance of valuable material possessions or resources
• all property that has a money value or an exchangeable value

So a millionaire is a person who has an abundance of valuable possessions or resources that is worth a million dollars or more. Or more specifically a millionaire is a person who has a net worth of a million dollars or more.

What is Net Worth then? Back to the dictionary. Net Worth is:

the excess of the value of assets over liabilities

So a millionaire is a person whose assets over their liabilities is a million dollars or more.

The simple formula for calculating your Net Worth is

(Sum of Assets) - (Sum of Liabilities)

The “sum of assets” means valuable items such as your house, your checking account, your savings account, your investments, your retirement account(s), etc.

The “sum of liabilities” means loans or debts like your mortgage, your car loan, your student loads, your credit card balance, etc.

2. How can someone become a millionaire making $60,000/year?

Assumptions

• 22 Years old
• $60,000 per year salary
• Retiring at 69 years old
• $1:$1 up to 3% match on their 401K contributions
• 7% average stock market return^{Market CAGR}
• Zero debt

How much does this individual need to invest per month in order to have a million dollars in retirement?

In order to calculate how much we need to save in order to have a million dollars, we need the formula for future value of investments.

P = PMT [( ((1 + r)^n) - 1) / r](1+r)

• where P is the value at the end of the investment period.
• PMT is the amount per year contributed
• r is the average interest rate expected
• n is the number of years

Next we need the maximum amount the employer will provide. Since they have a 401K match up to 3%, what can they contribute to get the maximum return from the contributions? that comes out to $1800 dollars.

If you solve the equation above for $1 million, you will find that the person needs to have around $2,838 a year put into their 401k account. Since they receive a match, they only need to put in half of that or $1,419 per year. Which is less than the maximum amount their employer will match, so we match that criteria. So per month the person needs to contribute around $118 per month.

Let’s take the analysis one step further, How much total did they contribute over the 47 years? It comes out to around $67,000. That means that $937,000 was gained off of the compounding interest. Which accounts for around 93% of the total value. This concept will take us into another post that will discuss, what investment accounts should we actually be using to save our money.

3. What can a million dollars at retirement get you?

What are the reasons to get to a million dollar net worth? Or even better, Why do I want to get a million dollar net worth at retirement? The true answer is that a million dollar net worth may not be enough for you, it depends on your financial and life goals. The point of the above analysis was to show how little a month needs to be saved to actually reach a million dollars

Let’s qualify a “little” saved a month, $118 per month is only 2.3% of their gross income. So they got to enjoy 97.6% of their income for that 47 years.

Well that is not actually fair, because we did not account for taxes, or living expenses. In 2019 their federal tax bracket is 22% if they are single, or 12% if they are married filing jointly. Their effective tax rate, living in Los Angeles, CA is 21.7%. Let’s estimate that for a single person in Los Angeles, CA that their living expenses are roughly $28,000/year. Living expenses include Rent, Car Insurance, Gasoline, Utility, Groceries. So they actually got to enjoy just shy of 29%(~$17,600) of their income for 47 years. That is a fair amount of money for stuff like trips, restaurants, movies, etc.

Back to our initial questions, What is the reason to get a million dollar net worth? Well if it is liquid money such as retirement investments after 59.5 years old, it can provide an income for you to live off of without the need to work. So what can a million dollars at retirement get you? Well most financial advisors will recommend a withdrawal rate of 8%, though that number has been decreasing to around 4% more recently. But we are going to go with 8% because this particular person is no concerned with a spouse or children, so they want to speed all of their money over time. An 8% withdrawal would provide $80,000 income for the first year of retirement, since the investments are returning 7%, they are taking out more money than their investments are gaining. But their retirement would last them about 28 years, with their income decreasing from $80,000 in the last few years to about $63,000. That is more than their yearly income for 47 years! So not a bad retirement.

4. Problems with our example

• The person never received a raise for 47 years.

  People in careers receive raises periodically, even if its just enough to keep up with inflation over their career. Very few individuals would stay at a job making the same amount they did when they started, even just a few years after starting. This would provide them with more money to save over time, even if they were still only saving 2% of their gross income.

• We only Looked at their 401k account

  When we defined millionaire, we said that it was the sum of your assets minus the sum of your liabilities. Yet we only looked at the 401k in the example. This is because one of our assumptions was that the person was a renter, and had zero debt in order to simplify the example. Debt subtracts from your net worth, while assets like a house adds to it. Your finances should be thought of as a whole.

• The person only saved 2% of their gross income

  It is usually recommended that everyone that can, save between 15% and 20% of their gross income for retirement. This would increase the amount of money the person in our example has at retirement. This would have the affect of the person retiring earlier, having more at retirement, or both.

Hopefully this has encouraged you to start saving and getting active in your finances!

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