The American Dream is dying. By that, I mean the idea that fortunes can be made by smart, hardworking folks of modest means. Oh, it's still possible -- but it doesn't seem attainable.

It wasn't always this way. During the Internet boom and the housing boom, rising asset prices fueled by cheap money acted as a substitute source of spending power. People barely blinked at the thought of needing $1 million or more for retirement. Americans believed they were wealthier than they actually were, and they spent and borrowed accordingly.

What's the American Dream, anyway?

This masked a stark truth: The gap between the rich and poor was growing, to levels not seen since the 1920s. And that gap was getting harder and harder to cross. Wages, which more than doubled between 1947 and 1973, have stagnated. The poverty rate has returned to 50-year highs. A record number of Americans rely on the government to help to feed their families.

Plus, politicians tell us Social Security and Medicare are doomed -- so $1 million for retirement seems a paltry sum, even if we can stay employed until we're 65 or 70.

The only sure way to survive seems to be getting rich, but what's rich? A recent survey of millionaires put the number at $7.5 million, which may sound like lottery money. There is a way there -- and yes, it's very hard.

The lottery economy
A lot of us dream of success based on talent and a lightning strike of luck. That's the classic rags to riches story -- the cornerstone of America's promise to the downtrodden and hardworking. That's why shows like "American Idol" and "Who Wants to be a Millionaire?" have become hits, tickling our fantasies just as Horatio Alger novels did in the late 1800s.

According to research by Anna Cristina d'Addio at the Organisation for Economic Co-operation and Development, the rich world's economic watchdog, the United States is slipping behind in the rankings of "intergenerational earnings elasticity" -- the probability that your children will earn more than you did. The United States is just ahead of Italy and Britain but well behind the likes of Australia, Denmark and Norway.

I believe this gets to the heart of the mixed emotions most have about the economy.

We're an optimistic people: While only 2% of people in a 2003 Gallup poll described themselves as "rich," 31% though it very or somewhat likely that they would be someday. A majority of young Americans believe they'll hit the big time eventually.

This could be one reason we think something is fundamentally wrong with the economy. A majority thinks we're in the midst of a recession or a depression.

But apart from winning the lottery, it's hard to see how we'll get rich.

The $7.5 million question

You can't get there, of course, until you decide exactly what constitutes "rich." It's a relative term.

That Gallup poll found the median definition of rich in the United States was an annual household income of $122,000 -- which is still close to the threshold income for being in the top 10% of households. To be honest though, you're just squeaking by if you make that much in high-cost areas like New York City or San Francisco.

Narrowing the focus to the top 2% of households -- to match the 2% of people that self-identify as rich in the Gallup poll -- puts the income threshold at $360,435, according to an analysis by the Tax Policy Center.

But a newer definition that might work better. Four in 10 millionaires recently surveyed by Fidelity said they still do not feel wealthy but would feel that way with $7.5 million in the bank. I'm sure many would feel that way with a lot less -- and the majority of millionaires in the survey said they started feeling rich at $1.75 million in investible assets. But for the sake of argument, let's call $7.5 million "really rich."

So what would it take to put $7.5 million in the bank?

Earning it in your paycheck

One way would be to climb the corporate ladder, join a high-powered law firm or become a high-traffic private-practice doctor. Of the 160 million households in the country, the Tax Policy Center estimates that some 433,000 earn $1 million or more per year -- just 0.3% of the total. Over a couple of decades, given the cost of fine suits, cars and the like, they might put away the $7.5 million to make them really rich.

Joining this upper echelon of wage earners is more difficult and less likely than most realize. Thomas DiPrete of Columbia University, who has written frequently about income inequality, took a look at the chances of becoming rich by digging into the data from the Panel Study of Income Dynamics, which has been measuring the incomes of American families since 1968. He used a number of thresholds, including a $300,000 limit that is close to the 2% concept described above.

The results were startling, showing that the likelihood that someone will become rich depends very much on where he or she starts. The overall chance that those under 30 will achieve an income of more than $300,000 a year within 30 years is between 2% and 3%. For those starting in the top 25% of household incomes (above $80,000 or so) the chances increase to 12% to 17%.

Even looking at this upper crust, it's clear that there is a big gap between what people believe and what they should expect in terms of income mobility. There's a chance of getting rich in the working world, but the odds are frequently overestimated.

And it's only getting harder. The structural problems at the heart of the rise in income inequality -- including globalization, technological development, and tax policy -- are likely to continue to cut the need for unskilled and marginally skilled laborers. Laborers won't earn enough to get rich, nor will their career paths take them to the executive suite.

Making it with your portfolio

As an investment writer, I wish I could tell you we'll all get rich in stocks. But the numbers just don't work.

Even if we assume that stocks will rise at a steady 8% per year (the average annual return of the S&P 500 since 1950) that wouldn't be enough to make the median household earning $42,327 a year anything like wealthy, according to Tax Policy Center data. Assuming a 5% savings rate, no taxes or commissions, and a 2% annual wage increase, it would take nearly 50 years to accumulate a single, cool million.

You can collect enough to fund a modest retirement -- good news -- if you stick with some basic principles, like those in "Build a $1 million 401k" or "Start investing with just $100."

But you won't end up with enough to make you really rich.

Of course, you could get lucky. Let's say you put a million into Google (GOOG, news) when it hit the market in 2005. In very round numbers, you'd have $5 million today. But you'd have to have had that million to start with, and have been willing to bet it all. For every stock like Google, is a handful of duds.

Going forward, making money in the market will likely only get harder. As I've described in previous columns, the market doesn't follow a smooth upward trajectory -- it moves in fits and starts. Right now, we're in the midst of a secular bear market. Stocks, represented by the Standard & Poor's 500 Index ($INX), are trading below levels first reached in 2000. For a buy-and-hold investor, that's 10 years of flat returns.

The problem is that the inflationary forces of credit creation, which pushed up the stock and housing markets rapidly from the 1970s to the mid-2000s, are unlikely to continue to be a source of wealth creation on the same scale. Americans are on the long path of getting out of debt after a borrowing binge. The U.S. Treasury is about to get started on the same road. The process is painful -- limiting spending, financial leverage and growth.

Another problem is that the demographic tailwinds just aren't there. Deutsche Bank analysts recently penned a research note titled "The End of Population Growth" where they project that the human race will no longer be replacing itself by the 2020s because of falling birthrates. There will be fewer young adults to push up the values of homes and other assets acquired over a working life.

Start your own shop

Now, for the good news. Clearly, there is still a path forward for those looking to jump higher in the social strata that doesn't require being a top entertainer, athlete or professional gambler. You need to start a business.

Thankfully, America is one of the best places in the world for entrepreneurs, ranked fifth globally, according to the World Bank behind Singapore, Hong Kong, New Zealand and the United Kingdom.

But starting is one thing. Succeeding is another.

I recently spoke at length about the issue with Jeremiah Sullivan, professor emeritus of international business at the University of Washington. He's been around the block, starting as a government barge inspector on the Hudson River in the 1960s before entering academia and spending the rest of his professional life studying global trade and factors that make businesses thrive.

He distilled his lifetime of knowledge and experience into four maxims for getting rich that are both pithy and profound:

1. Sell directly to consumers, not businesses.

The key here is the ability to build brand equity, which is the key asset for companies like Kraft Foods (KFT, news), Coca-Cola (KO, news) and Starbucks (SBUX, news). This is the domain of the marketing genius. This is what helped transform a flat Thai tonic that cured jet lag into the effervescent Red Bull energy drink empire and turned its founder, a one-time toothpaste salesman, into a billionaire.

Also, focusing on the consumer helps protect profit margins. Suppliers can always be squeezed by big companies looking to buy their output. But for consumers, a higher price sometimes creates its own demand if it conveys status and luxury.

2. Leverage to the max.

By borrowing to fund a business, you can maximize your chances of success and boost return on investment without great risk. After all, the value of your enterprise can only go to zero. Default is always an option. There are no debtors' prisons. And interest rates are low. Think of this as the Donald Trump maxim.

3. Sell potato chips, not computer chips.

You want to sell products and services that carry high margins, stable demand and rising prices. The lowly potato chip checks all of these boxes. Semiconductors do not. Other benefits of potato chips are low start-up costs, ease of entry into the marketplace, less onerous regulation and that fact that intense competition doesn't seem to affect profits.

If you're looking for ideas, Sullivan recommends looking for the products with the most shelf space at the supermarkets -- a sign of robust demand. Wine, snacks, candies and coffee all fit the bill.

4. Sell something that's mostly water.

One surefire way to ensure impressive profits is to make your primary ingredient water, something that's plentiful and virtually free. From hot dogs to cosmetics and soft drinks, a wide variety of items are mainly repackaged water. That keeps costs down.

One final point: At the end of our conversation, Sullivan made an interesting observation. The fact is most Americans don't want to get rich. Sure, they would like the money. But they don't want to make the sacrifices necessary to have a shot at becoming really wealthy: the enormously hard work, missed birthdays, long days and forgone vacations and weekends.

For many, additional income increases the incentive for leisure. Recent research by Nadia Steiber at the Vienna University of Economics finds that employees who are moving up in the world would actually prefer to work less. And with the advent of cheap manufactured goods and free sources of entertainment like Facebook and YouTube, it's easier than ever to find happiness with modest wealth.

So don't worry. Maybe money really isn't everything.

At the time of publication, Anthony Mirhaydari did not own shares of any company mentioned in this column.

Source: http://money.msn.com/how-to-invest/what-it-takes-to-get-really-rich-mirh...