How to build multi-generational wealth the old-fashioned way
Today’s article is simple, straightforward, and eye-opening.
When I started in this business one of the most interesting observations was how different the route to wealth was for each of our clients. Yes, there are the types of clients that you might expect; those who inherit large sums, business owners that sold their businesses, high earners (executives and physicians) and even lottery winners. The most interesting of all, however, are the ones who built significant wealth off strong, but not exceptional incomes. Their superpower – saving.
Since I’m a self-proclaimed nerd, I thought I might lay out some nerdy math to show you how two well earning individuals can accumulate multigenerational wealth by doing something really simple – saving 15% of their yearly income.
To be clear multi-generational wealth has no specific definition. For the purpose of this exercise, let’s assume the threshold is $5 million in today’s dollars on the last day of your life. Also, let’s quickly layout some other important assumptions:
- Yearly income: $90k each ($180k total)
- Tax rate: 27%
- Savings rate: 15% (+5% match)
- Living expenses: $95k (what’s left)
- Investment return: 7%
- Inflation: 3% (for income / expenses)
For many of my younger clients, this is a pretty typical scenario. Some are single earners with stay at home partners, some earn far more (and spend it), and others earn less (and save more). Nonetheless, this is a good reasonable starting point for discussion.
So, if you and your partner began this type of saving pattern at 25, continued it through age 65, quit working full time, and live to 100 where would you be?
The answer: $6 million of inflation adjusted dollars (Actual unadjusted value of nearly $60 million)
That is insane, right?!
Those aren’t exceptional earnings numbers or exceptional savings percentages and yet the ending number is absolutely, mind-boggling, exceptional. This doesn’t even assume huge pay increases or windfalls such as an inheritance. Just plain, old-fashioned, saving.
The math is simple but the follow through certainly isn’t. Events such as lay-offs, relocations, and health issues can wreak havoc on even the most well-meaning. If you’re in one of those rare phases of life, this likely isn’t a priority now. If you’re not, take a minute to log on to your company website or personal savings account and bump it up. Even a 1% increase can have a meaningful impact on long-term wealth.