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

Source: Pixabay

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:

YearNet SalarySpentSavedGrowthNet Worth
154,93637,90617,03042617,456
254,93637,90617,0301,29935,785
354,93637,90617,0302,21555,030
454,93637,90617,0303,17775,237
554,93637,90617,0304,18896,455
654,93637,90617,0305,249118,734
754,93637,90617,0306,362142,126
854,93637,90617,0307,532166,688
954,93637,90617,0308,760192,479
1054,93637,90617,03010,050219,559
1154,93637,90617,03011,404247,992
1254,93637,90617,03012,825277,848
1354,93637,90617,03014,318309,196
1454,93637,90617,03015,886342,112
1554,93637,90617,03017,531376,674
1654,93637,90617,03019,259412,963
1754,93637,90617,03021,074451,067
1854,93637,90617,03022,979491,076
1954,93637,90617,03024,980533,086
2054,93637,90617,03027,080577,196
2154,93637,90617,03029,286623,512
2254,93637,90617,03031,601672,144
2354,93637,90617,03034,033723,207
2454,93637,90617,03036,586776,823
2554,93637,90617,03039,267833,120
2654,93637,90617,03042,082892,232
2754,93637,90617,03045,037954,300
2854,93637,90617,03048,1411,019,470
 Net SalarySpentSavedGrowthNet Worth
Total1,538,2081,061,364476,844542,6261,019,470

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?

2 Replies to “Can Bolton Man on 80k get to be a millionaire?”

  1. > How likely is it that someone can follow this path to the destination?

    To answer your question above: it is pretty unlikely that anyone could follow this path as a flat level salary is somewhat unrealistic.
    All your other major assumptions seem IMO reasonable; albeit that the savings rate is pretty high and may, in most cases, also follow an increasing trajectory too.

  2. Thanks for your comment. I agree that the flat salary is unrealistic. I used that to keep this calculation simple. The savings rate is pretty high but it reflects, I think, what would be needed for that timescale.

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