Let us examine what happens to the wealth and income of a “high saver” and an “average saver” with a middle-class salary of $50,000 per year.

Without getting into the appropriate portfolio strategy for this middle-class investor, let us assume that our saver receives a 6 percent rate of return on his investments. This return is below the average return achieved by most private pension funds over the past 50 years and below the 8 percent assumed by most government pension funds.

If the middle-class wage earner is a “high saver” who saves 10 percent of his annual salary, or $5,000 per year, his wealth will be $70,000 at the end of 10 years. His annual income from this wealth will be $4,800. If he does not get a raise in his salary, his total income will be $54,800, or 9.6 percent higher than if he had not saved.

The really amazing result of being a high saver is that by the time he retires 45 years later, he is a millionaire, worth over $1.1 million. This nest egg is generating an income of $68,000 per year. His total income from salary and investment is $118,000 per year, 136 percent higher than his salary alone. He will not only replace his salary when he retires, his retirement income will be 36 percent higher than his salary. This is not the man who hits the lottery or invents the better mousetrap. This is the “millionaire next door”!

Unfortunately, the average American saves only about 2 percent of his income. The “average saver,” making the same $50,000 salary as the “high saver,” puts 2 percent of his salary, or $1,000 per year, into his investment account. At the end of 10 years, his wealth is $14,000 and his income from investments is $840 per year. His total income, assuming no salary increases, is $50,840, or 1.6 percent higher than his salary. When he retires 45 years later, his nest egg is worth $225,000 and it earns $13,500 per year. Clearly, this is not enough to replace his salary when he retires. 

At the end of their respective careers, the high saver is a millionaire and the average saver is considered a low-income retiree. The high saver’s income the year before retirement is 1.9 times that of the low saver!  Yet the high saver and the low saver started out with equal incomes and earned the same salary over their working careers. It is important to recall that the average saver spent $180,000 more over his 45-year working career than the high saver. The growing disparity in income over the 45-year period was solely due to the thrifty behavior of the high saver. Yet Americans are asked to feel sorry for the improvident average saver, and view the income and wealth of the high-saver millionaire as a source of taxes to subsidize the retirement of the average saver.