$1 million is still a lot of money. For someone living on a minimum wage income, it may seem like a hopelessly impossible amount of money to wind up with in retirement. It is certainly difficult to get to a $1 million nest egg on a minimum wage salary, but with enough time, consistent perseverance, and a reasonable rate of return, it's well within the realm of possible.
That's a pretty audacious statement. After all, minimum wage is $7.25 per hour. Assuming 40 hour work weeks and 50 work weeks a year, that works out to about $14,500 per year. Even if you worked 60 years at a minimum wage job and stuffed every penny you earned under your mattress, you couldn't make it to $1 million. To get to that $1 million mark from a minimum wage job, you need to invest.
Every little bit helps
Of course, investing is easier said than done with a minimum wage job. Even in the lowest-cost parts of the country, you need to cover housing, utilities, food, health, clothing, and transportation costs before you can think about investing. On minimum wage, even low-end ways to cover those core costs of living will eat up a substantial portion of your earnings.
With a low salary and so much of it eaten up by basic costs of living, you won't have much available for investing, but every little bit helps. Even a small amount, invested regularly for a long period of time, can eventually grow into a substantial, $1 million nest egg. Having both a target like that and a way to reach it just might provide you the motivation you need to keep your core costs of living as low as possible so that you can have a chance of getting there.
How is it possible?
Reaching millionaire status from a minimum wage income is possible only because of the incredible power of compounding over time. Those periods of time are measured in decades. The table below shows how much you need to save each month to get there by a retirement at age 70 -- expressed as both an absolute dollar amount and as a percentage of that $7.25 minimum wage.
|
Starting age |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
18 |
$47.24 (3.9%) |
$107.19 (8.9%) |
$232.87 (19.3%) |
$477.77 (39.5%) |
|
19 |
$52.22 (4.3%) |
$116.25 (9.6%) |
$247.95 (20.5%) |
$500.16 (41.4%) |
|
20 |
$57.72 (4.8%) |
$126.08 (10.4%) |
$264.05 (21.9%) |
$523.74 (43.3%) |
|
21 |
$63.81 (5.3%) |
$136.75 (11.3%) |
$281.25 (23.3%) |
$548.59 (45.4%) |
|
25 |
$95.40 (7.9%) |
$189.59 (15.7%) |
$362.85 (30%) |
$662.48 (54.8%) |
|
30 |
$158.13 (13.1%) |
$286.45 (23.7%) |
$502.14 (41.6%) |
$846.05 (70%) |
|
35 |
$263.39 (21.8%) |
$435.94 (36.1%) |
$701.90 (58.1%) |
$1,094.41 (90.6%) |
|
40 |
$442.38 (36.6%) |
$670.98 (55.5%) |
$995.51 (82.4%) |
$1,440.82 (119.2%) |
Data from author's calculations.
A few key things should jump out at you from that table:
- Start young: If you're just entering the workforce as a teenager, it could take as little as investing 3.9% of a minimum wage salary throughout your career to let you retire a millionaire. Wait too long, and you lose the benefit of decades of compounding.
- Invest for decent long-run returns: The stock market has its share of ups and downs, but over the long haul, it has delivered returns near that 10% level. To have a realistic chance of retiring a minimum wage millionaire, you need to be willing to put up with the ups and downs in the market to be able to achieve its long-run return potential.
- Keep your costs down: If you're only putting away $50 a month or so, even a discount broker's fees could eat through more than you can afford to lose. Your best options are no-cost Dividend Reinvestment Plans -- often called DRIPs -- or no transaction cost, low-fee index funds. Many of those types of funds have minimum investment levels, but some will have lower minimums if you're investing in a retirement account or directly through the fund house.
Another boost: Free money and IRS credits
If your job offers you a 401(k) or other company-sponsored retirement plan, you can invest, tax-deferred, straight out of your paycheck. If the company also happens to offer a match, that match will reduce the amount you need to invest out of your pocket in order to reach those savings targets. Whether or not your employer offers a retirement plan, you can still invest in your own Individual Retirement Arrangement and get the benefits of tax-deferred investing.
Additionally, as someone earning a low income, you may be eligible for the "Saver's Credit." The U.S. government offers a substantial tax credit to many low-income wage earners that could cover up to half of your contribution to a qualified retirement account. The credit can knock as much as $1,000 (or $2,000 if married filing jointly) off your tax bill, and can be as much as a 50% subsidy of the money you contribute to your plan. IRS publication 590 has details of that Saver's Credit at this link.
It may not be easy, and it may not happen fast. But with a long-term focus, consistent execution, returns in line with the market's long-run averages, and the ability to keep your costs of living down to the bare minimum, it is possible. There are no guarantees in the market, but you have to get started to have even a chance of getting there.
Note: The previous version of this article misstated the Saver's Credit. This version has been clarified. The Fool regrets the error.
