What does it take to achieve millionaire status at retirement? A simple formula, called the Wealth Multiplier, will tell you exactly how much you need to invest at any age to hit the millionaire milestone.
Introduction
I recently stumbled across a fantastic personal finance podcast called The Money Guy Show. Running for over 15 years, it’s a hidden gem that has quickly crept its way towards the top of my playlist.
Co-hosts Brian Preston and Bo Hanson drop consistent personal finance knowledge bombs (mixed with a healthy dose of southern charm for good measure). I’ve been binging a ton of their content over the past few weeks, but one concept stood out above the rest:
The “Wealth Multiplier.”
This beautifully simple concept has the power to change lives by helping younger investors appreciate the undeniable power of time and consistency in investing.
So while I recommend all of Brian and Bo’s content, this post provides a quick breakdown of what I consider their most impactful work. If it resonates, join me in binging the rest of their content. Your bank account will thank you later.
The Wealth Multiplier at a Glance
What is the Wealth Multiplier
There’s a ton of data flying around up there. Don’t let those pesky footnotes intimidate you. Let’s break it all down into digestible pieces. Cash Snacks style.
The Wealth Multiplier is a back of the envelope calculation. It simply tells you the expected value of every dollar that you invest, by age, at retirement.
Yes, it’s a simplified approach. It could be further refined by layering in more granular assumptions about inflation, returns by asset class, retirement age, etc.
But we won’t get lost in the nuance here. This is meant to be a simple illustration and it should fire you up!
Why the Wealth Multiplier Matters
The Wealth Multiplier says that a dollar invested right in this moment, regardless of age, is more powerful than any future dollar invested. The earlier you begin investing, the wealthier you will grow.
Given increased time to work its magic, compounding begins to exert more influence on wealth accumulation than effortful saving. And once you see this “light” you can’t unsee it. It’s an intoxicating notion if you have even a hint of money nerd in you.
Granted, it’s not rocket science. The mind-bending power of compound returns over time is a fundamental pillar of wealth creation. But the Wealth Multiplier crystallizes this idea in a compelling and straightforward way. If you grasp its implications, the Wealth Multiplier should inspire a call to action within you. It’s a financial war cry for young professionals. And it brings a smile to my face.
It’s tough not to smile, recognizing that every dollar invested today reduces the amount of stress, sweat, and labor required for you to achieve your financial goals. The markets will do the work for you. All that’s required from you? Hang on for the ride.
The Wealth Multiplier in Practice
While I always considered myself a disciplined saver, I didn’t implement a well-informed investing strategy until a sophomore year college internship. After building some modest cash reserves that summer, I decided to open a Roth IRA and invest in index funds. I was 20 years old.
By Brian and Bo’s math, these initial dollars that I put into my Roth IRA will each be worth about ~$88 by the time I retire. Not bad, but imagine seeing this chart in high school. If I had socked away my tutoring and lawn mowing proceeds at age 15 into an investment account, every dollar would be worth more than $145 in retirement!
This brings me to perhaps the most exciting extension of the wealth multiplier. Take a look at the “Savings per Month to be a Millionaire” column. While it’s nice to know that a single dollar could be worth ~$145 in retirement, it could also buy a slice of pizza…right now.
At 15, I’m ashamed to admit that I might’ve opted for that pizza. At that same age, if I heard I could be a millionaire just by scraping together ~$58 per month…that’s a life-changing perspective.
While this is an exciting thought exercise, it might sound discouraging for those of us well beyond the days of Driver’s Ed and SAT’s. Admittedly, that monthly investment requirement grows a decent bit as you hit your 20s and 30s.
But it shouldn’t demoralize you. Here’s why.
Great News at Any Age
For most young professional’s, the ability to generate income has likely outpaced the increase in the monthly contributions required. Let’s analyze my personal trajectory as a case study.
The highest wage that I could charge in high school, as a tutor, was $20 per hour. And I had to squeeze that work around a packed academic and extracurricular schedule.
Now at 26, the majority of my week is dedicated to earning income in a full-time job. An hour of my time is also worth drastically more due to my college degree and the enhanced credibility associated with a few years of work experience.
It may initially look daunting to calculate that I need to invest about 3.6x more money per month ($209 / $58 = 3.6x), but my ability to earn income has grown significantly more than 3.6x over that period.
This means that on a relative basis, it has actually become easier for me to save the monthly amount required to achieve millionaire status. This effect would be further amplified for the many of my peers who worked minimum wage service jobs throughout high school.
So fear not, friends. The Wealth Multiplier shouldn’t inspire regret or FOMO.
Rather, it should help illustrate the profound power of compound interest and time in the market. It should inspire action at any age. After all, the Wealth Multiplier implies that a dollar invested in this moment is more valuable than any dollar invested in the future. Seize the moment!