Can one really become the 'Millionaire Next Door'?

[clifp]

Quote:

Originally Posted by Fred123 Disclaimer: I haven't read the book myself. But, my understanding of the basic premise is that an average earner can become a millionaire by living modestly, saving, and investing the savings. It turns out that we have the perfect tool to test this: Firecalc! Even though I think it's over-optimistic, let's give it a shot. I ran it in reverse, starting with a 0 portfolio and using negative income, and it turns out that saving $15K/year for 30 years, invested in the default FC portfolio gives a 50% chance of saving about $1.2M. Now, the median household income in the US is $51K, and the taxes (SSI/Medicare + Fed) are about $6K, so that leaves about $45K for everything. So that leaves $30K/year for everything if you are going to become a millionaire in 30 years. And that assumes a 50% chance of "winning." If you want, say, a 75% chance it looks like you'd need to save $20K/year, leaving $25K/year. No doubt there will be some here that say that they could raise a family on $25K/year, but I think most would agree that that would be pretty unpleasant. And, I think that the vast majority of participants here made much more than $50k/year (in 2014 household) dollars during the course of their career. So I have to disagree with most posters here and say that the article was actually right on. Sure, it helps (a lot) to be frugal, but it also helps to be lucky.

First of all I don't think 30 years is long enough, we are talking the accumulation phase for non early retirees. If you start saving 10K a year, at age 25 and continue saving at 10K adjusted for inflation by age 65, you'll have a portfolio worth 1.7 million (inflation adjusted) on average and 98% chance of ending up with more than $1 million at age 65. Now I made one significant change I started out with 95/5 AA and starting at age 55 moved it gradually to 75/25. (I used ********.com)

One of my IRA is all from contribution which were a few thousand a year from age 22-25 and then between 8-12K (max allowed by company into 401K) from 1985-2000. It is now worth over $1 million. Now I'll be the first to admit that I invested in a very good time for the market, and made some combination of smart and lucky investment but consider I hit the million mark saving less than 1/2 of what suggested and similar time frame, you'll understand why many of us think the LA Times reporter is full of it.

I agree that those in the bottom 20% will have a virtually impossible time becoming millionaires unless they increase their income. But for the median and above workers, saving 20%,10K+ is not impossible and while it may not be enough for an early retirement, a good chance you'll end up a millionaire by regular retirement age.

[jim584672]

"I see no special heroism in accumulating money," Taleb wrote, "particularly if, in addition, the person is foolish enough to not even try to derive any tangible benefit from the wealth.... I certainly do not see the point of becoming [a millionaire] if I were to adopt Spartan (even miserly) habits and live in my starter house."

Wow, this statement shows an incredible amount of stupid, IMHO.
I guess NOT being someone's slave (a worker) has no value.
Having the security of being financially independent has no value either.

Having control over your own time - PRICELESS, but to him it is WORTHLESS.

[MichaelB]

"The Millionaire Next Door" heavily influenced my thinking in a positive way. For me the key message was not how to accumulate $1M, or even who could do that. I always viewed the $1M as symbolic.

My most important takeaway, which remains with me today, was that financial independence did not depend on income, it was a function of saving. Most people could become financially independent if they saved first and then spent, and when they spent, they did so based on need, not want.

It was a very simple message, but one I never articulated before reading the book.

[Mo Money]

Quote:

This hardly seems a route to wealth for "ordinary people", unless you consider ordinary people those who get advanced degrees.

I have a law degree. Am I special? No. Slightly above average IQ, INFJ, born to two working-class parents. My mom sold insurance by phone at night to help make ends meet. I borrowed 60K in 1980s dollars to get my BA and JD degrees. I am ordinary, and I worked my a*s off to pick, and learn, a profession that paid well, then I started at $28K a year and lived below my means.

TMND was an inspiration to me, and in my view was a bit of a self-help book by showing what the authors' studies revealed. I then tried to model myself, in part, on the millionaires studied. I think the book says, directly or indirectly, that you can be financially independent if you take the tools you have and use them correctly. Even if you are ordinary.

So I think it is a bit of a self-help book, and certainly a study of millionaire data. But I don't think it requires anything other than ordinary people to engage in the self-help.

The LA Times writer was smug and snarky and self-congratulatory in his "let me say why this book was a lie" put-down of a study that helped a lot of people become prosperous. If that's self-congratulatory on my part to say that, so be it.

[marko]

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Originally Posted by clifp I really reject the premise of the article that it is harder to become a millionaire now than it was in 1996.

Plus, a million dollars isn't what it used to be

I remember when an annual $10K was considered executive pay. So the book has it all wrong; it should be easier than ever to be the M next door.

[truenorth418]

Having read TMND several times, I would add that it is not a "how to" book on how to get rich on a coffee shop salary or how anyone could achieve $1MM net worth by forgoing caffe lattes. Nor did it argue that anyone who went into business for themselves would get rich. It was an academic study of the characteristics of million dollar net worth households in the U.S.



They didn't say "Do this and you will become rich".



They said, "Here is a profile of rich households, you might be surprised at what we found."



Big difference.



In my case, I was already interested in becoming financially independent but not making much progress. The book inspired me to create a formal plan to achieve it. I have friends and colleagues who read the book, took nothing away from it and years later are still working at jobs they hate.



It was not "luck" that I chose to take something tangible from the book's findings while others didn't.

[truenorth418]

As for Mr Reed, he died at the age of 92. He lived through the Great Depression, WWII, Stagflation, the Tech Bubble, and the 2008-09 market collapse - and apparently invested and lived a low profile lifestyle over his entire lifetime. It wasn't just the impact of the go-go 90s or whatever. He benefited greatly from decades of dollar cost averaging, the magic of compounding, and the time value of money. Ok, lucky he lived so long, but his choice to manage his money this way.

[papadad111]

Agree. Snarky article. Agree he missed the point of the book and sounded a bit like sour grapes.

As others have said I contend it is easier today than any other time in American history for an American to become a millionaire.

The book is my all time favorite financial oriented book and validated that the path that I was on would lead to financial freedom.

It would be cool to re-do the research with updates 20-25 years later and see what still holds in terms of the current millionaires "habits". Tech has likely changed the landscape some, But I bet the majority are doctors lawyers corp execs and small - medium sized business owners in the service sector.

[travelover]

My take away from the Millionaire Next Door is that when DW says I dress like a bum, I can honestly reply, "no I dress like a millionaire".

[sheehs1]

Quote:

Originally Posted by MichaelB "The Millionaire Next Door" heavily influenced my thinking in a positive way. For me the key message was not how to accumulate $1M, or even who could do that. I always viewed the $1M as symbolic. My most important takeaway, which remains with me today, was that financial independence did not depend on income, it was a function of saving. Most people could become financially independent if they saved first and then spent, and when they spent, they did so based on need, not want. It was a very simple message, but one I never articulated before reading the book.

+1
Same for me. It was at this time, after my lightbulb moment, and after reading this book that I realized it was not just about the savings side. It was also about the debt reduction and paying attention to the spending side. Put the two together and the net, cumulative affects allowed for a "fighting chance".

As I recall from the book, his explanation of one particular older couple was that a good portion of their wealth was in the equity in their home and a 2nd piece of real estate that over the course of decades they had paid off. He was shocked that they were millionaires because they did not look the part.

The book wasn't just about "saving" a million dollars, although there certainly was that message. It was also about all those things that factor into one's net worth.

[Andre1969]

I can relate to what that article is trying to say, about it not being as easy for today's generation to amass wealth through hard work, saving, and LBYM as it was back in the day.

That doesn't mean you should give up completely, but it's not as easy, with today's stagnant job market, high cost of education, etc. I graduated college completely debt free, and landed a fairly decent job while I was still in school, so I had a pretty good head start. I ran into some obstacles along the way, such as buying a condo before I was truly ready to take on that responsibility, getting into a bad marriage, and so on, but I managed to pull through.

And, for all the talk of a "lost decade" in the 2000's, I've had a pretty good run in the stock market, from 1998 when I started getting serious about investing, until today. So maybe there was a little lucky timing there.

But, at the same time, I'm sure there are plenty of kids today who end up in my same situation...graduate debt free and land a decent job. And, who knows what the stock market may hold for future generations?

I guess you could say that the "millionaire next door" is a bit of a myth, simply because as a portion of the population, there aren't that many. It's not like they're all over the place. Using that net worth percentile calculator that's been referenced in other posts lately, it looks like if you're between the age of 55-65 and have $1M, that puts you in the top 16% of your group.

But, when you consider the timeframe that book was written, there are probably more millionaires next door, thanks simply to inflation. It was written in what? 1996? Adjusting for inflation, $1M then would be like $1.5M today, so I guess you could say it's 33% easier to become a millionaire today than it was back in 1996!

FWIW, if you're 55-65 and have $1.5M saved up, that puts you just shy of the top 10% of your group (89.92%)

[Midpack]

Quote:

Originally Posted by Andre1969 I can relate to what that article is trying to say, about it not being as easy for today's generation to amass wealth through hard work, saving, and LBYM as it was back in the day. That doesn't mean you should give up completely, but it's not as easy, with today's stagnant job market, high cost of education, etc. I graduated college completely debt free, and landed a fairly decent job while I was still in school, so I had a pretty good head start. I ran into some obstacles along the way, such as buying a condo before I was truly ready to take on that responsibility, getting into a bad marriage, and so on, but I managed to pull through. And, for all the talk of a "lost decade" in the 2000's, I've had a pretty good run in the stock market, from 1998 when I started getting serious about investing, until today. So maybe there was a little lucky timing there. But, at the same time, I'm sure there are plenty of kids today who end up in my same situation...graduate debt free and land a decent job. And, who knows what the stock market may hold for future generations? I guess you could say that the "millionaire next door" is a bit of a myth, simply because as a portion of the population, there aren't that many. It's not like they're all over the place. Using that net worth percentile calculator that's been referenced in other posts lately, it looks like if you're between the age of 55-65 and have $1M, that puts you in the top 16% of your group. But, when you consider the timeframe that book was written, there are probably more millionaires next door, thanks simply to inflation. It was written in what? 1996? Adjusting for inflation, $1M then would be like $1.5M today, so I guess you could say it's 33% easier to become a millionaire today than it was back in 1996! FWIW, if you're 55-65 and have $1.5M saved up, that puts you just shy of the top 10% of your group (89.92%)

The article is fine. But it simply misrepresents the book and it's author, as if the web article author had never read the book. He should never have forced a connection between the article he wanted to write, and the book. That's all anyone here is taking issue with...

[GTFan]

Quote:

Originally Posted by Andre1969 I can relate to what that article is trying to say, about it not being as easy for today's generation to amass wealth through hard work, saving, and LBYM as it was back in the day. That doesn't mean you should give up completely, but it's not as easy, with today's stagnant job market, high cost of education, etc. I graduated college completely debt free, and landed a fairly decent job while I was still in school, so I had a pretty good head start. I ran into some obstacles along the way, such as buying a condo before I was truly ready to take on that responsibility, getting into a bad marriage, and so on, but I managed to pull through.

But we'll always need good people in the trades and they can easily make enough money to save and invest, there is no reason to spend a lot of money on higher education if you don't want to. Hell you can go in the military and do your 20 while saving as much as you can and still be a millionaire factoring in your pension etc.

I disagree that it's a lot harder now overall, but agree that the traditional white collar approaches may be more expensive than when we went to college 30 years ago. Of course there are a lot of ways to reduce college costs too such as using community colleges and working your way through school. There's no reason to carry debt except for what you think you can get back afterwards (within a relatively short time frame).

[mystang52]

It's been years since I read the book. But I had 2 takeaways: these people were hard workers, and were classic LBYM'ers. I don't recall the income levels, but if it was the aforementioned $200,000 or so more power to them - they worked hard, they're "allowed" to make that income. And they didn't let the income go to their heads and overspend.

[photoguy]

I enjoyed reading the TMND and the stories about individuals who LBYMd to success. Even though the book is essentially a collection of anecdotes, there's simply no question that with a given income, if you reduce spending you'll be more likely to hit millionaire status. It would have been nice if the author did a broader study that addressed the issue of only looking at the winners (i.e. survivorship bias) but the initial message was important enough.

Quote:

Originally Posted by clifp I really reject the premise of the article that it is harder to become a millionaire now than it was in 1996.

Quote:

Originally Posted by GTFan I disagree that it's a lot harder now overall, but agree that the traditional white collar approaches may be more expensive than when we went to college 30 years ago.

I think it's probably far easier to hit millionaire status (inflation adjusted) today than it was in 1996 as there has been substantial real wage growth. While the median wage may not have moved much, the higher deciles (say 80-90 percentile) have definitely increased.

Quote:

Originally Posted by papadad111 It would be cool to re-do the research with updates 20-25 years later and see what still holds in terms of the current millionaires "habits". Tech has likely changed the landscape some, But I bet the majority are doctors lawyers corp execs and small - medium sized business owners in the service sector.

I'd be surprised if a huge chunk aren't engineers (of all types).

[38Chevy454]

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Originally Posted by Chuckanut What the author does not understand is that many people prepare themselves to take advantage of opportunity when it strikes. You can't take advantage of a big drop in housing prices (such as occurred abou 6 years ago) or a big run-up in the market (such as we recently experienced) if one does not have some $$'s put away. Luck is when preparation meets opportunity. Sure, some people are dealt a bad hand due to illness, etc. Other, stumble into a large inheritance or just happen to share a dorm room with a future high tech billionaire. But, for most of us, the good fairy did not bonk us on the head and make us rich. We had to do many things over a long period of time to get to where we are.

Chuck is completely right, great post. Too bad the author of the article does not understand this. - especially the sentences I highlighted.

You have to have the right mindset and be prepared, and be willing to forego short term satisfaction for long term success.

[gozer]

The thing that has always fascinated me about books like the Millionaire Next Door, is how 2 people can read it and come away with entirely different things.

One person finds the meaning of life in a bubble gum wrapper and another person reads (insert holy book here) and finds nothing but poorly worded, inaccurate historical fiction.

[Ronstar]

Quote:

Originally Posted by photoguy I enjoyed reading the TMND and the stories about individuals who LBYMd to success. Even though the book is essentially a collection of anecdotes, there's simply no question that with a given income, if you reduce spending you'll be more likely to hit millionaire status. It would have been nice if the author did a broader study that addressed the issue of only looking at the winners (i.e. survivorship bias) but the initial message was important enough. I think it's probably far easier to hit millionaire status (inflation adjusted) today than it was in 1996 as there has been substantial real wage growth. While the median wage may not have moved much, the higher deciles (say 80-90 percentile) have definitely increased. I'd be surprised if a huge chunk aren't engineers (of all types).

I agree - probably a big pct of MND's are engineer types. It seems to me that engineers save more and are not caught up in keeping up with the Joneses as much as other professions.

Also seems like many MND's are self employed contractor types, since the no. 1 vehicle of MND's per the book is the Ford F-150 pickup truck.


Sent from my iPad using Early Retirement Forum

[harley]

Quote:

Originally Posted by Ronstar Also seems like many MND's are self employed contractor types, since the no. 1 vehicle of MND's per the book is the Ford F-150 pickup truck.

I'm not sure that follows, since the F-150 is also the best selling vehicle in America in general. And since a lot of the F-150s are fleet vehicles, many of them are driven by wage slaves. Personally, I know as many engineers with F-150s as I do contractors. Been looking at one myself.

[NW-Bound]

Quote:

Originally Posted by jim584672 "I see no special heroism in accumulating money," Taleb wrote, "particularly if, in addition, the person is foolish enough to not even try to derive any tangible benefit from the wealth.... I certainly do not see the point of becoming [a millionaire] if I were to adopt Spartan (even miserly) habits and live in my starter house." Wow, this statement shows an incredible amount of stupid, IMHO. I guess NOT being someone's slave (a worker) has no value. Having the security of being financially independent has no value either. Having control over your own time - PRICELESS, but to him it is WORTHLESS.

I don't know the context of the above writing by Taleb, but could it be that he was talking about people who amassed several millions, but lived like a pauper?

There was a such a story recently. And 3 or 4 years ago, a man in Phoenix who lived in a homeless shelter and ate charity meals left behind a few million dollars to charities when he died.