Many young people count becoming a millionaire as one of their lifetime financial goals. To reach this goal through saving money, several factors need to be considered, including the amount you save, your rate of return and state and federal tax rates. Changing any of these variables will affect your chances of becoming a millionaire.
Average Annual Return
In becoming a millionaire, you will save your money in interest-bearing bank accounts or certificates of deposit, or invest the money in mutual funds, stocks or bonds. The amount of appreciation of your assets on a yearly basis is called your "annual rate of return." The average of these rates over the course of your path to becoming a millionaire is called your "average annual return." Standard rates of return for savings options range from 0 percent to 5 percent. Historical rates of return for investment options range from -5 percent to 10 percent, though potential losses or gains might be unlimited, depending on your investment strategy. Increasing your average annual return will shorten the amount of time it takes to become a millionaire.
The tax rate you pay on your savings and investment gains will affect how quickly you can save $1 million. If you are investing in tax-deferred retirement accounts such as 401(k)s and IRAs, this tax will be computed after the withdrawal period has begun. When calculating your tax rate, be sure to include both federal and state taxes on your investment income. The amount you pay in taxes will lessen the amount of investment gains you will receive and be able to reinvest.
Reaching Your Goal
Beginning at age 18, you can become a millionaire at age 89 if you save $2,500 per year ($48 per week), achieve a 5 percent average rate of return, and pay a 28 percent federal tax rate and 3 percent state tax rate. The age to reach your goal drops to 69 if you can save $3,500 per year ($67 per week) and achieve a 7 percent annual rate of return, assuming the same tax rates. If you can manage to save $6,000 per year ($115 per week) and achieve an 8 percent annual rate of return, you can become a millionaire by age 57.
Rate of Inflation
As you do the calculations for your own path to $1 million, bear in mind that inflation dictates that a future dollar will have less buying power than today's dollar. This means that $1 million in 40 years will be worth less, in terms of purchasing power, than it is worth today. The rate at which the buying power of a dollar decreases is called the "rate of inflation," referring to the inflating cost of the goods and services purchased with dollars. For example, if you start at age 18 and raise $1 million by the time you are 64 and there is a 3 percent average annual rate of inflation, your $1 million will be worth approximately $256,736 in the equivalent purchasing power of today's dollars.
- saving image by Lyle Doberstein from Fotolia.com