Author and speaker Chris Hogan, who is part of Dave Ramsey’s team, just came out with a new book titled, Everyday Millionaires. In some ways, it is a follow-up to his earlier book on retirement, Retire Inspired.
The book summary says that is shows:
…how ordinary people built extraordinary wealth—and how you can too. You’ll learn how millionaires live on less than they make, avoid debt, invest, are disciplined and responsible!
I once met Chris Hogan and attended a training class he taught at Dave Ramsey’s headquarters in Nashville. He is a pretty amazing guy, and an outstanding author and speaker (very funny). I read Retire Inspired, his last book, but I haven’t read this latest one. However, I like the idea that it promotes the quintessential Dave Ramsey wisdom of living on less than you earn, avoiding debt, and wisely saving and investing for the future so that you can live and give generously in the future.
The main point of the book appears to be if an ordinary person does this consistently, for most of their adult life, they’ll probably end up a millionaire.
The book obviously makes a big deal about becoming a millionaire. But what exactly is a millionaire? And is becoming a millionaire a reasonable goal, especially when it comes to saving for retirement? What if we fall short (as many will)? And most importantly, how does being a millionaire line up with the biblical warnings about the dangers of wealth?
What is a “millionaire”?
On his blog (and, I assume, in his book), Chris describes a millionaire as a “net-worth millionaire,” which he defines as, “what you own minus what you owe. If that amount ends up being $1 million or more, you’re a net-worth millionaire.”
In simple accounting terms: assets (money and property) minus liabilities (debts) = net worth.
I don’t know how Chris addresses this in his book (I assume he elaborates further), but calling someone a millionaire because they have a million dollar net-worth can be a little misleading. Let me explain…
A 50 year old couple making $120K a year, that owns 2 cars each worth $20K, lives in a house worth $600,000 with a $250,000 mortgage, and with $610,000 in retirement savings would be a millionaire in net-worth terms: [$40,000 + ($600,000 – $250,000) + $610,000 = $1,000,000].
My point is that they are “net-worth millionaires” in terms of the value of their assets minus liabilities (which is a great place to be), but they are not millionaires in terms of being able to write a check for a million dollars. That’s because some of their assets are “liquid” (can be easily spent) and some are “illiquid” (can’t be easily converted to cash).
For example, you can spend the money in savings account, or you can sell investments in a brokerage account. But you can’t easily spend the equity in your house without selling it, refinancing it, or putting a second or reverse mortgage on it. And refinancing or mortgaging it may decrease your net-worth since you are increasing the liabilities side of your balance sheet, especially if you spend the equity for something that doesn’t add to your assets column.
For that reason, I think a better description of a millionaire is someone having $1 million in investable assets, excluding their residence and other property. What if you inherited $1 million from your rich uncle, but your annual household income is $60,000, would you consider yourself a millionaire? You may “feel” like a millionaire, but it is likely that you would at some point start tapping your million-dollar inheritance for things that you can’t afford on your salary. In other words, your millionaire status may not be sustainable.
On the other hand, if you had an income of $200,000 a year for the last few years, with expectations of similar amounts going forward, you might think of yourself as a millionaire, if for no other reason that you are earning a million every five years.
How can you become an “everyday millionaire”?
It actually isn’t that hard: save consistently over a long period of time and earn a decent (but not necessarily spectacular) return and stay out of debt and you could eventually become an “everyday millionaire.”
For example, if you are 25 years old and you save $500 per month ($6,000 per year) and get a 6% annual return, you will become a millionaire by age 66. If you start at age 35 and save $1,000 per month (or $12,000 per year) at a 6% return, you will have a million by age 65. Even someone who earns only a 2% annual return can save a million by saving $2,000 a month ($24,000 per year) for 30 years.
Obviously, the earlier you start, the more you save, and the better your return, the sooner you will reach the million dollar mark. But there is a problem: $1 million ain’t what it used to be. Moreover, a million dollars thirty years from now won’t have nearly the same purchasing power it does now.
Someone with $1 million today is not as “rich” as someone who was a millionaire 20 years ago. According to the US government’s CPI Inflation Calculator, it took over $1.5 Mil. in 2018 to buy what $1.0 Mil. would have purchased 20 years ago, in 1998. The culprit, of course, is inflation. Therefore, someone retiring in 1998 with $1 million would have been much better off in terms of purchasing power than someone retiring now.
A recent Merrill Lynch report revealed that a majority of people think they need less than $1 million saved for retirement; in fact, almost a third said they needed less than $500,000. A similar survey by the Employee Benefits Research Institute (EBR) found that 69 percent of those surveyed thought they’d need less than $1 million.
A lot of people think they will need less than $1 million for retirement, even though it is has lost a third of the purchasing power it had 20 years ago, and some believe they can get by on much less.
$1 million is traditionally a number that a lot of financial advisors recommend that people shoot for. And a lot of people set that as a saving goal. The fact that books like Everyday Millionaire, The Millionaire Next Door, The Millionaire Mind, and Faith-Based Millionaire, have been so popular suggests that it is an amount that has a lot of significance for people. And you may be familiar with the TV show, Who Wants to be a Millionaire?
But based on a 2016 study by the Federal Reserve Board’s Survey of Consumer Finance (SCF), average household retirement savings for those between the ages of 65 and 74 was $358,00, and the median retirement savings (which is a better indicator), was only $126,000. No matter which figures you use, many are getting to retirement age with far less than $1 million in savings.
Is $1 million enough for retirement?
Let’s look at $1 Mil. in the context of retirement for a couple with $60,000 in pre-retirement income. If they need $50,000 of income in retirement, and withdraw 5% of $1 Mil. from their savings, they will have $50,000 a year, or $4,167 per month, pre-tax – done.
If they also receive Social Security benefits of $1,200 per month ($14,400 per year), they will need to withdraw $35,600 per year from savings, which is 3.56% instead of 5% and a much safer withdrawal rate. At a 4% withdrawal rate, they would not need $1 Mil. in savings – $890K would also produce the required $35,600 in additional annual income.
Based on these numbers, $1 million seems to be a pretty reasonable target for someone in their income range. But keep in mind, this is all pre-tax. If the savings are in a qualified retirement plan such as a traditional IRA, 401(k), etc., and our couple is in a 15% federal and state tax bracket (after deductions), they will need to withdraw an additional an additional $3,576 per year to pay their taxes on total income of $47,840 (taxable income of $23,840). (Remember, a portion of their Social Security benefits is not taxable). That amounts to a slightly higher withdrawal rate of 4.4%.
Whether $1 Mil. is enough or not is a very individual matter. If you are in a higher income bracket, perhaps making $100,000 a year, and need $80,000 in retirement, $1 million may be enough if you have at least $40,000 of additional income from Social Security and a pension.
And even if you have $1 Mil. saved, will it grow enough to keep up with inflation? Inflation has averaged 3.62% over the last 40 years but is currently running a little less than 2% a year. No one knows what it will be in the future, but an average of 3% is a pretty good guesstimate.
Inflation has the opposite effect on those just starting. At an average annual inflation rate of 3%, a 30-year-old who wants to have the equivalent of one million in today’s dollars will need over $2.5 Mil. in savings at age 65. Yikes!
If you kept your savings 100% in cash, it would lose 3% per year or more due to inflation, and if withdrew 4% of it a year, it would be 100% depleted in less than 25 years.
I can’t say whether you need to save a million dollars or not. If you are very frugal, and even more so in retirement, it may be possible to reduce your income needs and savings requirements considerably.
The big lesson here is that a million ain’t what it used to be and won’t be in the future. So, when it comes to saving for retirement, in addition to prudent and informed risk in managing your investment portfolio, you will also need to factor in inflation and taxes to become a millionaire in today’s dollars.
Does $1 million make you “wealthy”?
In the financial services industry, someone with liquid assets between $1 million and $5 million is considered a “high-net-worth-individual” (HNWI). Someone with assets between $100,000 and $1 million is considered “affluent” or “mass affluent.”
Interestingly, according to the U.S. Census Bureau, when asked how much does a person need to be considered “wealthy” in America, survey respondents said that it would take an average of $2.4 million, which is in the “high-net-worth” category.
I find this all very interesting when you consider that the average American with a net worth of $175K is wealthier than the average person in any other developed country in the world.
According to a survey by financial giant Charles Schwab, for others, wealth is a much more abstract concept. Some equate wealth with enjoyable life experiences (24%); others view it as having “peace of mind.” Having loving relationships (12%) is considered “wealth” by some. But having lots of money (27%) and being able to buy anything they want (22%) is also part of being wealthy.
As Christians, our “wealth” has less to do with our “net-worth” and more to do with the riches we have in and through Christ (Rom.11:33). But does that mean that we shouldn’t seek to increase our “net-worth” if we need to and if we can?
Is it wrong to want to be an “everyday millionaire”?
Is it wrong to want to save a million for retirement? The short answer is, “it can be.”
If you believe that getting “rich” is having at least $1 million in the bank and that saving that amount will lead to happiness, contentment, status, and a carefree and secure lie, then you have probably fallen in love with money, which is something that the Bible repeatedly warns against:
No one can serve two masters, for either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve God and money (Matthew 6:24, ESV).
Keep your life free from love of money, and be content with what you have, for he has said, “I will never leave you nor forsake you (Hebrews 13:5, ESV).
For the love of money is a root of all kinds of evils. It is through this craving that some have wandered away from the faith and pierced themselves with many pangs (1 Timothy 6:10, ESV).
The love of money is dangerous because, when we love something, we tend to be consumed by it. It rules us and ends up driving our values, motives, and actions instead of God and his Word.
Although God unquestionably calls us to value many things more highly than money, he does so without ever condemning wealth. There is nothing in the Bible that says it is wrong to be a millionaire or to have a goal to save a million for retirement. Many well-known characters in the Bible were wealthy by today’s standards: Abraham, Job, Joseph, and Solomon to name a few.
The Bible does, however, warn against becoming like the “rich fool” in Luke 12. Jesus didn’t call the man a fool because he was rich, or because he had been dishonest, or because he wasn’t frugal. The rich man was a fool because, even though he had everything he could want or need, he wanted more; he was caught up in what he owned and was not being rich toward God and others. And the meaninglessness of his riches was revealed when he died a short time later, and his material goods were no longer of any use to him.
While it is prudent to save, and the money we save isn’t evil in itself, Christians know that real wealth is not measured in dollars; it is being rich toward God. Therefore, we must resist becoming like the rich young ruler who put his faith and trust in his wealth instead of God. His sin was not in being wealthy, but that he had made his wealth his God; his was the sin of idolatry. In his desire to become rich trapped him in his own “senseless and harmful desires,” which ultimately led him “into ruin and destruction” (1Tim.6:9).
The rich fool believed that he was the source of his wealth and that he had the right to do with it as he pleased. But the biblical frame of reference is that real wealth comes from God: “Both riches and honor come from You, and You reign over all. In Your hand is power and might; in Your hand, it is to make great and to give strength to all” (1 Chronicles 29:12, ESV). Without the merciful kindness and goodness of God, we would have nothing.
While our efforts in the form of labor, diligence, discipline, and planning are vital, God alone is the sole source of all we have. As our Creator, our lives and everything in them is a gift from him. “Every good gift and every perfect gift is from above and comes down from the Father of lights” (James 1:17, ESV).
God defines wealth differently than we do. Monetary riches is one kind of wealth, but it is worldly wealth. Biblical wealth is the abundant blessings we receive from God through his Son, Jesus Christ. Even the poorest of men who know God as his Savior is wealthy beyond measure compared to the rich man who does not know Christ. And many Christians who are “poor” by worldly standards in this life will be “rich” in the life to come (1 Tim.6:19).
To those who aspire to become everyday millionaires, the Apostle Paul said this:
As for the rich in this present age, charge them not to be haughty, nor to set their hopes on the uncertainty of riches, but on God, who richly provides us with everything to enjoy. They are to do good, to be rich in good works, to be generous and ready to share, thus storing up treasure for themselves as a good foundation for the future, so that they may take hold of that which is truly life. (1 Tim. 6:17-19, ESV).