The Median Income Is Rising, But No One Is Saving Anything

The largest factors in determining if and when we will become financially independent are: (1) how much we save each year; and (2) time.

Unfortunately, far too many Americans save almost nothing, making financial independence a pipe dream.

Household Incomes and Saving Rates

The median income is rising in America, up to $61,372 in 2017.  The average married couple filing joint tax returns in 2017 made $117,795.

However, as of July 2018, the average savings rate of Americans’ disposal income is just 6.8%.  That’s dreadful, especially when you consider it is only a percentage of disposable income, not gross income.

These abysmal savings wouldn’t happen if everyone paid themselves first.  Paying yourself first means picking a savings rate and prioritizing it over any discretionary spending.

Most people do the exact opposite – they spend their paycheck on everything else and only save what is left over.  Usually, little or nothing is left over.  They are not saving for their financial independence at all, let alone factoring inflation into their retirement savings number.

Paying yourself first can be easy.  Pick an annual savings target and then have that amount automatically taken out of your paycheck.  Live off of the rest.

Reaching Millionaire Status

Let’s look at how our $117,795 joint filing and the $61,372 median income households can become retirement millionaires.  (In this example, we assume that both spouses are working, making them each eligible to contribute to a Roth IRA).

Just by maximizing traditional retirement tax advantaged accounts (and not getting into using the HSA as a retirement vehicle – a subject for a future post), the average joint filing couple easily become multi-millionaires by saving the following each year:

  • 401k (15% of total salary with no employer match) = $17,769
  • Roth IRA = $11,000  ($5,500 each)

Total saved = $28,769 or roughly 24% of the joint filing couple’s gross income. 

Saving $28,769 still leaves our average joint filing couple with $89,000 to cover taxes and their living expenses, even without saving another dollar.

Assuming 8% investment returns, they will  be millionaires in 17 years.  They’ll be multi-millionaires 7 years later.

Our median household income doesn’t have as much excess cash to work with, but still can become millionaires.  Saving 15% of their income in a 401k  amounts to $9,205 per year.  (We’re going to assume this household is not able to also save the additional $11,000 towards a Roth IRA or the purposes of this example).

If they can save $9,205 per year consistently, they will be millionaires in 29 years.

(Calculations courtesy of (note:  no affiliate relationship).

If our median income household saved only 10% of their income, it will take another 5 years to reach $1 million, but they will still get there.

However, because of inflation, our median income household may not feel like millionaires once they finally have $1 million in their 401k account, nearly 30 years from now.  Assuming an average rate of inflation of 2%, $1 million will be more like having $563,000 today.

Inflation is just one more reason why it is important to pay yourself first and save as much as possible, as early as possible, in order to maximize compounding and reach financial independence.

2 Replies to “The Median Income Is Rising, But No One Is Saving Anything”

  1. Time and savings rate are the two biggest factors that determine how fast you go along the path to wealth.

    Lot of people recommend a 15% savings rate. That is not a bad goal to hit. Unfortunately with the delayed start physicians have (can set you back about a decade) this savings rate will likely be inadequate due to that lost decade. 20-30% savings rate will be needed to have an equivalent end point to someone starting earlier.

    The best thing about the process is in the end your savings rate can go into the stratosphere as your money is making money as well as your main gig money while expenses diminish (paid off mortgage) or stay the same.

    1. Absolutely agree – thanks for the feedback Xrayvsn.

      While a lot can be done with 15% plus Roth IRA contribution (whether backdoor or not) just with time, I view this amount as the bare minimum for professionals and others not on the lower rung of the income range.

      My joint filing couple in this example should be able to save more than this.

      High earning professionals should definitely try to do what is necessary to be in the 25%+ savings range to help secure their financial independence.

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