How to Retire With $1.2 Million on an Average American’s Salary

If you think you’ll never become a billionaire, you’re probably right. But if you think you’ll never become a millionaire, there’s a good chance that you’re wrong. It’s a very achievable goal for many of us — and even if you don’t quite achieve it, you may be able to come close.

Here’s a look at how you may be able to retire with $1.2 million — while earning a typical salary.

Image source: Getty Images.

Defining terms

Before jumping into exactly how to make $1 million on an average salary, let’s discuss terms a bit. If you look up typical incomes in America (and elsewhere), you’ll run across averages and medians. For those who don’t know the difference, consider this sequence of numbers: 10, 20, 30, 40, and 100. To average them, you add them all up, getting 200, and divide by five (the amount of numbers you added together), getting an average of 40. The numbers’ median, though, is the number in the middle of the sequence: 30.

An average salary may not be too close to what a typical person earns if there are some extreme outliers, such as a bunch of multimillionaires and billionaires. A median figure will ignore the magnitude of outliers and will simply reflect the middle number.

It’s also worth noting that while it can be interesting to see what an average income level is, it will be different for different kinds of workers. For example, the Bureau of Labor Statistics reported median weekly earnings for full-time workers of $1,010 in the fourth quarter of 2021. That’s $52,520 on an annual basis. But break it down by gender and women’s median earnings were $930 ($48,360 annually) — only 84.3% of the median for men of $1,103 ($57,356). Black workers, meanwhile, earned a median income of $805 ($41,860 annually), with Hispanics at $799 ($41,548) and Asians at $1,384 ($71,968).

These numbers are all for full-time workers. Many people work part-time and earn far less.

A median salary of $52,520

We need a single number to work with here, so we’ll use that median salary of $1,010 per week, or $52,520 per year for full-time workers.

Everyone’s tax bite will be different, depending on their various circumstances. One estimate of the average effective federal tax rate in America was 8.2% for the years 2010 to 2018. As many people face state-level income taxes, too, let’s just use 10% for our total tax hit, lopping $5,252 off our $52,520 salary and leaving us with $47,268. That amounts to close to $4,000 per month coming in. Now, let’s see what you can do with that.

Image source: Getty Images.

Telling tables

A common rule of thumb in the past has been to save 10% of your income. Let’s see what it looks like if we sock away $400 per month, or $4,800 per year. We’ll assume an average annual growth rate of 8%, as that’s a bit more conservative than the overall average annual growth rate of the stock market of close to 10%, and we’ll include 10% and 12% growth rates, too:

$4,800 invested annually for

Growing at 8%

Growing at 10%

Growing at 12%

10 years

$75,098

$84,150

$94,342

15 years

$140,757

$167,759

$200,416

20 years

$237,230

$302,412

$387,354

25 years

$378,982

$519,272

$716,803

30 years

$587,260

$868,528

$1.3 million

35 years

$893,290

$1.4 million

$2.3 million

40 years

$1.3 million

$2.3 million

$4.1 million

Calculations by author via MoneyChimp.com.

The table above shows how you might achieve millionaire status by socking away and investing only 10% of your typical salary of $52,520 (less taxes). Of course, it might take more than 35 years to do so. If you’d like to get there faster, save and invest more.

For many of us, saving 10% of our income isn’t enough. The table below shows how much you might amass if you invest twice as much — fully 20% of your post-tax monthly income of $4,000. That would be around $800 per month, or $9,600 per year:

$9,600 invested annually for

Growing at 8%

Growing at 10%

Growing at 12%

10 years

$150,197

$168,299

$188,684

15 years

$281,513

$335,517

$400,831

20 years

$474,460

$604,824

$774,708

25 years

$757,962

$1.0 million

$1.4 million

30 years

$1.2 million

$1.7 million

$2.6 million

35 years

$1.8 million

$2.9 million

$4.6 million

40 years

$2.7 million

$4.7 million

$8.2 million

Calculations by author via MoneyChimp.com.

By saving and investing more, you’ll reach $1.2 million much sooner — in less than 30 years if your money grows at an average rate of 8%. If you’re 40 now, you could be a millionaire before you hit 70 — giving you a sizable nest egg for retirement.

Earning more — or less

Of course, certain returns are never guaranteed in the stock market. So prepare for low returns and hope for high returns. Here are some other considerations:

If you can save and invest even more than that $9,600 per year, you can become a millionaire much sooner.
As your salary rises over time, you’ll be able to save and invest greater sums.
If you’re in a two-income household, saving and investing larger sums should be more manageable. Some couples have tried extreme measures — such as living off of one salary and banking the other. That can be difficult, but it can result in plenty of money for retirement — or even an early retirement.
Remember that your earliest invested dollars can be your most powerful, as they’ll have more time in which to grow. So consider being extra aggressive about saving and investing sooner rather than later. Perhaps take on a side gig or two for at least a few years starting now.

How to invest for sufficient growth

Lastly, you may be wondering just how to go about targeting that 8% or even 10% growth rate. For most of us, the best strategy is to invest in the stock market. There are many ways to go about doing that. The simplest method — and a still very effective one — is to invest in one or more low-cost index funds that track the broader market — such as S&P 500 index funds. That way you’ll earn roughly the same return as the S&P 500, less fees.

You might also focus on dividend-paying stocks, as they offer not only the prospect of stock-price appreciation, but they also generate fairly reliable income — and often increase their dividend payouts over time.

Then there are growth stocks, which you might pepper into your portfolio, hoping for some outsize returns. Growth stocks can indeed surge in value — but some can fail, too, so don’t just rush in. For best results, consider following The Motley Fool’s investing philosophy, which will have you buying 25 or more stocks and aiming to hold on to them for at least five years. That can give even overvalued stocks a decent chance to grow into — and beyond — their intrinsic values. And it will increase the odds of your having some superstars in your portfolio to make up for the inevitable disappointments. If this strategy works for you, you might have average annual returns closer to 12% than to 8%, which can help you get to that $1 million even faster.

If you’re going to be investing in individual stocks, whether dividend-payers, growth stocks, or any others, be sure to read up on how to invest in stocks. Read a few good books on investing, too. You might do well putting some or much of your money in index funds and the rest in growth stocks or other kinds of stocks. If you don’t want to choose growth stocks on your own, consider a good growth stock exchange-traded fund, or ETF — that’s a fund that focuses on a basket of growth stocks and will quickly spread your dollars across many.

There’s a good chance that you can amass $1 million before retiring — even if you earn an average, or median, salary. Even if you don’t quite get there, you can at least get much closer to that than you might have imagined.

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