How many times have you heard something like this:
If you start saving $300 a month at age 25, by the time you’re 60 you’ll be a millionaire.
While not technically false (assuming you could earn a 9.5% return each and every year), such statements make it seem as if it’s easy to become a millionaire. They imply that anyone can do it.
Unfortunately, these thought experiments rely on two big assumptions: (1) what you save over time doesn’t change, and (2) your rate of return is high and consistent every year. However, we know that both of these are empirically false. Incomes (on average) tend to rise as people get older (which means savings rates tend to be variable over time) and market returns are rarely average.
So, what if we fixed these assumptions and provided a more realistic view of how people save over time? Rather than theorize about whether the typical person could become a millionaire with a fixed saving amount and constant investment returns, why don’t we use historical data to see what could’ve actually happened instead?
Thankfully, we can. By using the Federal Reserve’s Survey of Consumer Finances, which provides a financial snapshot of U.S. households every three years, we can test these thought experiments. If we examined households when their first snapshot was taken (in 1989) up through their latest snapshot (in 2022), we would have 33 years of data to rely upon. That’s almost a household’s entire investment time horizon!
While this data won’t follow the same set of households over time, it will allow us to follow households in the same age cohort over time to see how they are doing (as a group). From here, we can then simulate what that typical household would’ve needed to do to become a millionaire.
