Welcome to Year 8 of of our 15 Year Millionaire Series. If you are new to compounding returns, make sure to sign up free to our RSS Feed or Email Newsletter.
So far we have covered the first 7 years of our plan to become a millionaire in 15 years. To read the rest of the series, please visit The 15 Year Millionaire Series.
In keeping with the structure of the series, during each year of the 15 Year Millionaire Plan, compounding returns has focused on the building blocks of a robust portfolio by analyzing and focusing on basics like real estate, tax advantaged accounts such as 401(k) and IRA investment plans, and traditional taxable accounts.
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In order to keep things organized and provide a benchmark for how executing this plan will allow you to build wealth quickly, the end of each post includes a summary of what the typical participant's account balances might look like at the end of each year (assuming historical average rates of return throughout the course of the series). This allows readers to see the effects of the plan over time.
The goal of the series is to offer a concrete plan for building a million dollar net worth in 15 years, while emphasizing the simple building blocks of a robust portfolio, and how each can benefit you as an investor.
Working the Plan:
During the last several years of our plan, we have instituted our save your raise challenge, saving each pay increase received. This year we will do something similar, except that during year 8, we will begin to regularly invest in a taxable brokerage account in addition to our tax sheltered investments.
Save Your Raise Challenge:
For mathematical reasons, throughout the 15 Year Millionaire series, we have assumed an annual pay raise of 5% per year. Last year, we increased our savings rate by contributing much of the difference between our former salary and our current salary. We will do the same during year 8, however, during year 8 we will begin to sock the money away in an easily accessible taxable brokerage account.
Saving Your Raise:
During Year 7 of the plan, we assumed a salary of $67,003. After a 5% salary increase, your pay during year 8 of the 15 Year Millionaire Plan should be approximately $70,353. This is an increase of $3,350 per year (before taxes).
Assuming a 25% tax rate, you should take home around $2,500 a year more. In order to contribute close to the full amount of your raise to your taxable brokerage account, you'll contribute $200 a month to your taxable brokerage account.
Why You Need a Taxable Brokerage Account:
For the average investor, it makes sense to focus investment efforts primarily on tax sheltered accounts such as Roth IRAs and 401(k) accounts. 15 Year Millionaire Participants, however, are not average investors. We are a group of people seeking to build wealth in the quickest and most efficient manner possible, while diversifying risk within our investment portfolios.
Investing money in a taxable brokerage account is a form of risk mitigation, as it allows the 15 Year Millionaire participant to access their savings for everyday purchases in the future without the tax punishment associated with early withdrawals from tax sheltered accounts.
Choosing a Brokerage:
If you are in the market for a taxable brokerage account, you may feel overwhelmed by the variety of choices. When choosing a taxable brokerage account, the most important factors to consider are the costs and convenience of your chosen accounts.
Because compounding returns does not advocate high frequency trading, but rather longer term fundamentally sound investing, it is important to choose a brokerage that will help you reap the benefits of long term investing. Look for online brokerage accounts that allow no cost DRIP investment, as well as scheduled monthly transfers to the fund or equity of your choice.
One excellent brokerage for the long term investor is ING Direct's Sharebuilder program. Not only does Sharebuilder allow scheduled transfers and no cost DRIP Investment, but also allows the purchase of partial shares of stock, which is a great boon for those who prefer to choose their own portfolio of stocks. Overall, Sharebuilder offers many excellent advantages to investors, and is one of the best online brokerages.
What to Invest In:
Within your taxable brokerage account, there are no limits on the type of investment you can opt to hold. This makes the question of what to invest in a difficult one to answer.
If you are a hands off investor, you may want to consider a low cost index fund. If you are somewhat more hands on, you may opt to build a portfolio of individual stocks.
There are as many investment strategies as there are investors. Just make sure you completely understand any investment that you choose, and track the performance of your portfolio accordingly.
Your Brokerage Investment Over Time:
$200.00 a month deposited into your taxable brokerage account may not seem like much, but after only 7 years of investing (Year 15 of the 15 Year Millionaire Plan), your account balance could be as much as $25,046.00 (assuming historical stock returns).
15 Year Millionaire Stats: End of Year 8
As promised, each week we will offer another set of tips and challenges for becoming a millionaire in 15 years, along with tracking the effect of these changes and strategies over time. By following the 15 year millionaire plan, your accounts and net worth will be somewhere in the neighborhood of the following. (Assuming that you began the plan within the parameters described in the first post of our series. All changes instituted throughout the program remain in effect. In addition, we will assume a 5% annual salary increase as well as the following: 10% annual stock market returns, a 1.5% return on savings, and a 3.0% annual increase in the value of real estate.)
Salary: $70,353.00
Bank Account- Emergency Savings ($300.00 per Month): $29,636.98
Bank Account- Down Payment on a Home: $0.00
Debt- Mortgage: $53,596.00
Real Estate Value: $179,107.00
401(k) (15% Contribution + 6% Employer Match): $151,825.00
Roth IRA (Max Contribution): $61,923.00
529 Account: $5,280.00
Bank Account- Itemized Savings ($275.00 per Month): $16,760.00
Taxable Brokerage Account Balance: $2,400.00
Net Worth: $393,335.98
Next Monday's Post:
Thank you for reading the 15 Year Millionaire Series. Next week we will challenge you to diversify your portfolio even more. Click here to read Year 9: Diversify your Investment Portfolio.
Photo By: DSLRNinja
I understand this is a hypothetical and the numbers vary. Just wanted to let you know that based on my household's 30 year experience, 5% raises each year didn't happen. We were closer to 3 - 4 % in the years we got raises.
ReplyDeleteI'm sure you realize a million is not what used to be! The stock market over a very long time (40 years) averages 8-10% return. You may be too optimistic, but don't let anything stop you!
ReplyDeleteI agree with familymoneyvalues...I think it is highly unrealistic to think you will 5% per year for 15 years. It's easy to make hypothetical money with unrealistic assumptions. What would your model look like if you assumed a 3-4pct raise every other year?
ReplyDeleteHi there.
ReplyDeleteMost of the sites, are counting on 7% return, as average.
However here is some sobering facts:
- Only 202 of the 500 biggest companies in the United States in 1980 were still in existence 20 years later.
- On December 29, 1989, Tokyo's Nikkei stock average reached its all-time peak of 38,915.87. Twenty years later, the Nikkei has never again reached that level — and, in 2009, reached a new low of 7,054.98.
Reality is, on a personal example - I invested into a various assets real money and since 2008 it is a zero sum game, at best.
Nothing tells me that tomorrow will be different.
New to this series and enjoying it! I especially appreciate the focus on investing. Coincidentally, one of my clients at work studies how people become millionaires, and it seems that "smart investing" is one of the top factors America's wealthiest households ($1 million - $25 million in net worth)cite as their sources of wealth accumulation. http://www.millionairecorner.com/article/sources-wealth
ReplyDeleteWhat a great idea! I like seeing the growth of a portfolio and invested assets. If everyone used only a few tips, they would benefit from increased net worth. I see several comments were made about getting a 5% raise every year, but you could also assume that those funds could come from a side business. A 3% raise with income from other ventures would easily put you at 2500 extra a year.
ReplyDelete