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  • Writer's pictureJen Lincoln

Middle-Class Millionaires: How to Become Wealthy without a High Income

Updated: Jan 22, 2022

Millionaires are, overwhelmingly, not born, but made. Most people who are wealthy accumulated their wealth slowly. Time, in itself, is a valuable asset, if not the most valuable asset, for accumulating wealth.

One accumulates wealth via three steps. First, one must save money earned. Second, one must invest money saved. Third, one must wait, passively, and allow the power of compound interest to allow investments to grow. These steps are sufficient to allow even an average earner to become a millionaire in their lifetime, as I will demonstrate.

Consider the following hypothetical. While the hypothetical herein examines a US National, the concepts here can apply in any society.

Middle Class Heroine

Hannah, a Middle Class Heroine, is a teacher in the United States. She is not wealthy, bringing home a $69,000 salary per annum. After taxes, her net income is $59,000.

Hannah does, however, budget and live modestly. She has the following expenditures:

Housing: $16,140/annum (27% of her gross income)

Living: $22,860 (39% of her gross income)

Her total expenditures are thus $39,000 (66% of her gross income). Her total savings are $20,000 (34% of her gross income).

If Hannah works as a teacher for 40 years, saving $20,000/annum, her savings will equal $800,000 in 40 years. The moment she begins investing, however, the wealth accumulation becomes dramatic.

Single Investment

If Hannah invested just one year of her annual savings of $20,000, this one year of capital would accrue as follows:

$20,000 at 7% for 10 years -> $39,343

$20,000 at 7% for 20 years -> $77,394

$20,000 at 7% for 30 years -> $152,245

$20,000 at 7% for 40 years -> $299,489

So if Hannah invested only one year of savings, she would have $1,079,489 [(39 x 20,000) + $299,489)], rather than just $800,000.

Continual Investment

If Hannah invests her savings annually in a diversified index fund, she can expect the following growth:

$20,000 at 7% for 10 years -> $335,015

$20,000 at 7% for 20 years -> $954,697

$20,000 at 7% for 30 years -> $2,173,706

$20,000 at 7% for 40 years -> $4,571,681

Hannah’s wealth would grow as follows:

Middle Class Hannah would become a millionaire after 20-21 years.

Real vs. Nominal Rate of Return

Critics of long-term investment planning may insist that taxes and inflation will eat away at investment returns. There is certain truth to this. The 7% ROI is usually not a real rate of return, but rather a nominal rate of return, as investments may be taxable, and inflation, at about 2.5%, is all but guaranteed in a healthy economy. However, if Hannah’s investments are in a low-cost, diversified index fund, these accruals are stronger than these effects, examined below.


Hannah cannot expect to retain all her wealth. Any amount which is not put in a tax-sheltering vehicle like a Roth IRA will be subject to capital gains tax. If Hannah begins withdrawing her accrual after a long-term investment duration, she will pay up to 15% of capital gains. Thus, her accrual of $4,571,681 – 15% = $3,885,929. It should be pointed out that this capital gains tax of 15% is much smaller than the 35% she may face is she engaged in short term buying and selling of her funds.

Individual Retirement Account/ 403(b)

This section pertains to US Nationals. As mentioned, because Hannah is a US National, Hannah can shelter from her tax requirements by placing as much of her savings as possible in a Roth IRA when she invests. US nationals, and permanent residents, have the opportunity to utilize Traditional or Roth IRA’s.

A Traditional IRA, and a Roth IRA, allows one to contribute up to $6,000 per annum. In a Traditional IRA, the contributions are tax deductible. Distributions, however, are taxed as income.

A Roth IRA, on the other hand, allows anyone under 50 to contribute up to $6,000 per annum (in 2019). Contributions are not tax deductible, and so contributions are all after-tax. There are no taxes, however, on distributions. The advantage of contributing to a Roth IRA, besides the higher limit, is thus that that accrual, which is generally far more than the principal, is tax-free.

If Hannah contributes $6,000, or the Roth IRA limit for that year, each year of her career, she will be able to significantly shelter her investments from taxes.

Hannah can also contribute up to $19,000 each year (as of 2019) in a 403(b), a tax-sheltered annuity plan for public school employees.

Although I have not considered these numbers in the remaining calculations, all nationals should investigate what tax shelter vehicles are available to them, and include these in their financial planning.


However, the historical ROI on diversified index funds is significantly greater than historical rates of inflation. Inflation generally accrues at 2.5%, leaving one’s investment vulnerable to a 2.5% annual reduction due to interest. A principal will halve every 20 years due to this reduction.

In the case of Hannah, her accrual of $3,885,929, which is the amount she would have after paying capital gains tax should she withdraw her investment in 40 years, would have the purchase power parity of $1,447,239 at that time.

While this $1,447,239 may seem like an eroded return, compare this amount to how much Hannah would have if she had merely saved her earnings, at the rate discussed previously. Had she saved $800,000 in total, 40 years later, this amount would have the purchase power parity of $297,945. The mere act of placing her savings in an index fund made her a millionaire in all regards, considering even the erosion from inflation, while accruing savings did not.

Pension Payments

All persons living in countries with pension programs should read about, and carefully consider how to participate in, such programs. Pension programs are responsible for depleting poverty among the elderly in developed countries. Pension payments are assets which generally cannot be garnished by creditors, or expended all at once. Be aware that living abroad and/or early retirement may negatively effect one’s pension entitlement. Each person’s situation is different, and so all persons planning for retirement should examine their personal circumstances. If you are a US national or permanent resident, I recommend opening an account at, and examining your personal circumstances, and Social Security accrual, recorded there.

In Hannah’s case, she worked entirely in the United States, consistently paying FICA tax. Her Social Security accrual upon Full Retirement Age is $23,244/annum. If she lives 16 years past full retirement age, as she is likely to do as a female US national, her social security income will be as follows:

Social Security income: $23,244 x 16 = $371,904

Hannah’s Retirement

Hannah’s retirement accrual, and withdrawal, can thus be expressed as follows:

$1,447,239 + $371,904 = $1,819,143

$1,819,143 / 16 = $113,696/annum

Hannah can expect to withdraw, and live on, $113,696 per annum. Relative comfort in her retirement is due to her savings rate, investment planning, and the power of compound interest. She was a professional, but she not high-earner, nor did she ever own all or part of her own lucrative business (as a physician, accountant, or attorney may).

The major lessons learned from this should be:

Money earned today is worth more tomorrow if invested.

Money spent today would have been valued more tomorrow if invested.

Cumulative interest from diversified investments is stronger than inflation.

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