Can Bolton Man on 80k get to be a millionaire?

On BBC’s Question Time TV programme, last week in Bolton, a man earning over £80,000 criticised Labour’s higher tax policy. He believed (wrongly) that earning over £80,000 didn’t put him in the top 5% of earners. That incorrect claim was swiftly rebutted. This led to a wider debate in the media.

I was interested to read that according to Torsten Bell, director of the Resolution Foundation: “You may need to earn only £80,000 to join the 5% club for earners, but that’s unlikely to ever be enough for you to join the top 5% club by wealth. To achieve that, you need housing or savings of almost £1m – which you’ll probably have to inherit or marry rather than earn. That’s the result of our stagnant incomes but soaring wealth of recent years.”

I commented elsewhere that I think many in the FIRE community (those seeking, or having achieved, Financial Independence Retire Early) will disagree with that pessimism on wealth building. I think someone earning over £80,000 in income should eventually accumulate over £1 million in wealth from reasonable saving and investing.

A follower of FIRE blogger Mr Money Moustache saving 31% of salary would look to be able to retire after 28 years of work on 70% of salary. This is based on 5% investment returns after inflation. You can run this calculation on the networthify calculator, or in an excel spreadsheet.

I used these annual figures in my calculations:

• Gross salary £80,000
• Income tax £19,500
• NI £5,654 (UK current position at 29/11/2019)
• Net Salary £54,936
• Savings £17,030
• Savings rate 31%
• Spending £37,906

This gives the following year by year growth in net worth:

Year	Net Salary	Spent	Saved	Growth	Net Worth
1	54,936	37,906	17,030	426	17,456
2	54,936	37,906	17,030	1,299	35,785
3	54,936	37,906	17,030	2,215	55,030
4	54,936	37,906	17,030	3,177	75,237
5	54,936	37,906	17,030	4,188	96,455
6	54,936	37,906	17,030	5,249	118,734
7	54,936	37,906	17,030	6,362	142,126
8	54,936	37,906	17,030	7,532	166,688
9	54,936	37,906	17,030	8,760	192,479
10	54,936	37,906	17,030	10,050	219,559
11	54,936	37,906	17,030	11,404	247,992
12	54,936	37,906	17,030	12,825	277,848
13	54,936	37,906	17,030	14,318	309,196
14	54,936	37,906	17,030	15,886	342,112
15	54,936	37,906	17,030	17,531	376,674
16	54,936	37,906	17,030	19,259	412,963
17	54,936	37,906	17,030	21,074	451,067
18	54,936	37,906	17,030	22,979	491,076
19	54,936	37,906	17,030	24,980	533,086
20	54,936	37,906	17,030	27,080	577,196
21	54,936	37,906	17,030	29,286	623,512
22	54,936	37,906	17,030	31,601	672,144
23	54,936	37,906	17,030	34,033	723,207
24	54,936	37,906	17,030	36,586	776,823
25	54,936	37,906	17,030	39,267	833,120
26	54,936	37,906	17,030	42,082	892,232
27	54,936	37,906	17,030	45,037	954,300
28	54,936	37,906	17,030	48,141	1,019,470

	Net Salary	Spent	Saved	Growth	Net Worth
Total	1,538,208	1,061,364	476,844	542,626	1,019,470

So, it may take 28 years and a savings rate of 31% but it is possible for someone who is just inside the top 5% of earners to accumulate over £1 million in wealth or net worth. This is a simple calculation and doesn’t allow for any earlier and lower earnings and savings, nor any later and higher earnings and savings. It ignores any contribution from employer pension contributions, or from house price growth.

The savings rate equates to our £80,000 earner effectively living on the equivalent of £50,638 of gross pay. At a marginal tax and national insurance rate of 42% the £17,030 of net pay saved is equivalent to £29,362 of gross pay. This saving of £17,030 in net salary is asking the top 5% earner to live on the earnings of a top 12% earner. This is based on government statistics from 2017 which showed that you needed £75,300 to be in the top 5% and £49,600 to be in the top 12%.

Moreover, the net worth accumulated would support a 4% “safe withdrawal rate” of £40,779 which is in excess of the annual spending of £37,906. Assuming that this net worth is all or mostly tax sheltered in an ISA or pension or is only subject to the 7.5% dividend tax then tax would be minimal and less than this excess. After the 28 years financial independence would therefore be achieved.

If you are able to earn at that 5% level but spend at that 12% level then based on these assumptions you can accumulate the net worth to become financially independent and to continue to live at that 12% level.

This also works for lower earners who can save that same percentage of their net salary. Someone earning £40,000 in gross pay would need to save so as to live on the equivalent of a £25,983 in gross pay. Spending would be only £21,208 but saving £9,528 each year should grow and accumulate to £570,381. This would then support a “safe withdrawal rate” of £22,815.

At all levels of earning you would need to be able to spend significantly less than you earn, as in these examples, in order to achieve financial independence and be able to retire much earlier than is the norm. That should be easier to do the more you earn but it requires the commitment to do it. Maybe that was what Torsten Bell thought would be unlikely. What do you think? How likely is it that someone can follow this path to the destination?