Becoming a millionaire has long been part of the American dream, but saving $1 million is not just an idle fantasy for most Americans. Saving at least $1 million is a dream many feel must come true if they're going to have a comfortable retirement.
Continue Reading Below
In fact, of the Americans who have attempted to figure out how much they must save for retirement, 37% believe they need at least $1 million, according to research from the Employee Benefit Research Institute.
Saving enough for retirement is a significant source of stress, and it's natural to worry about reaching a savings goal of $1 million. Banking this much money may seem impossible on an average person's salary. But could it actually be realistic? Can the average person, without a big inheritance or a lucky lotto win, become a millionaire?
Image source: Getty Images.
Can you actually become a millionaire on an average salary?
There are a lot of factors that determine whether you can save $1 million or not, including how much you can invest and how fast those investments grow. The biggest factor, however, is your age when you start saving.
The table below shows the amount you would need to save -- and the percentage of your monthly income you'd need to save -- in order to become a millionaire by age 63, the average retirement age in the U.S.The calculations assume you save the same amount each month until you turn 63, earning an average return of 7% per year. The monthly income is based on the Bureau of Labor Statistics' data on median pre-tax earnings in late 2016.
Obviously, it's much easier to become a millionaire if you start early. If you wait until 55 to begin saving, it's impossible to save enough to become a millionaire if you earn the median monthly income -- unless you get very lucky with your investments.
Is becoming a millionaire a realistic goal for the average person?
Most Americans don't save 13% of their income, much less 23% or 55%.
In fact, 46% of Americans save less than 5% of what they earn, according to a March 2017 survey commissioned by Bankrate of more than 1,000 households. Nineteen percent of survey respondents said they save none of their annual income, and only 25% of respondents said they save 11% or more.
But is it possible for the average person to actually meet the savings goals necessary to become a millionaire? Consider the spending of a frugal 20-year-old who needs to save 13.35% of a $2,288 median monthly income.
If that 20-year-old paid the median rent in one of the 10 cheapest U.S. cities, their monthly housing cost would be $632. Add on around $300 monthly in federal taxes, an average student loan payment of $242, a low-cost grocery bill of $206, average internet and utility bills of $364, and average commuting costs of $216 -- and they'd be spending $1,960 monthly just for necessities.
If we reserved $305 for savings, it would leave our 20-year-old with just $22 in spending cash. And that doesn't include a cellphone, clothing, or entertainment expenses.
It's possible to spend less -- perhaps by living with parents, having a roommate, or opting for income-contingent student loans. The 20-year-old's salary will also increase, and saving $305 per month will become much easier as they get older.
Still, these numbers show that when you earn the median income for your age group, you have to start saving young and live frugally if you want to become a millionaire. You can definitely do it -- but you must spend and save very carefully.
The $16,122 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.