Many people want to benchmark how much wealth they have with averages or with what the typical person has. If you are a particularly aggressive saver and investor, you may be doing yourself a disservice by setting the bar so low by a comparison with the average.
How much should you be worth?
I love reading those surveys that you see in yahoo finance or forbes that give you a wealth breakdown by age. Of course thats only part of the equation. Your wealth function is going to be determined by age, income, your savings rate, and probably most significantly, your investment ability.
If you are able to make good investment choices, you can significantly accelerate your net wealth far more than the average person. However, you don’t even need to be a superstar investor to outperform the wealth tables.
So how much wealth do people have?
Here’s a quick look at average wealth distribution by age.
30 – $10k
This isn’t the full story however, because it doesn’t account for income variations. If you are earning 2x the national average in income then, you’d expect to have accumulated wealth to be significantly above what others your age may have accumulated.
Saving rates are another big factor. These change with age and as you go through various life changes. I know our saving rate went through a large change as soon as we had kids (diapers and daycare really add up!). Also, as you age, you develop healthier attitudes towards money. Even if you don’t make another dime as you get older, you should at least be saving more of what you make.
Finally, how you invest can make a huge difference to how much you earn. Taking a conservative route and sticking your money in bonds and savings accounts will likely see less wealth accumulation than if you went heavily into stocks and shares.
Putting It All Together
So what should you be worth? I’m going to make some assumptions here and assume average incomes by age based on publically available data. I’m also going to assume that all income saved was fully reinvested back into high growth assets like stocks, and not kept in cash or under the mattress!. Finally the savings rate is the slightly tricky part, but I’m going to assume a steady increase in savings rate by age group over time, partly reflecting improving ability to save more money and also reflecting increases in income.
So the framework that I’ve put together is driven by my key drivers of wealth creation. These are income (and more specifically after tax income), the effective savings rate that you can generate and the investment return that you can earn.
While investment returns are probably the most powerful driver (even a slight increase in investment returns can have a huge impact on long term wealth), being able to favorably impact this is probably the most difficult (it’s hard to invest like Buffett, much as we’d all like to be able to!).
Savings rates are probably the easiest to impact with favorable lifestyle changes. Increases in income are possible if you are willing to look at frequently moving around to other companies, or reskilling yourself to jump into positions of growth.
With that said, here are my bold assumptions for what is possible in terms of net worth:
For folks on an average income, I assume that a saving rate of between 10-20% would be possible across all ages. While this is certainly a stretch from the average saving rate of less than 2%, I don’t think it’s impossible to bring this up much higher with some discipline and diligence.
With average incomes across the board of between $30-$40k for all ages 20-60 in the US, and the ability to have a mixed investment portfolio earning a rate of return of close to 7%, that should lead to wealth generation of almost $1M for the average person at the time of retirement!.
Top 10% of Income earners
The top 10% income earners earn considerably more than the average. I suspect many of these folks are located on the coastal areas of the US, where cost of living is also significantly higher.
For folks on higher incomes, it should be possible to save a minimum of 20% of their income, and likely increase this over time and with age. Again, I’m assuming that you spend a smaller percentage of your income as income rises.
With the top 10% of income earners having an income between $70-$120k on average, assuming the ability to save between 20-40% of income, average wealth for this group of $3.5M by 60 should be easily achievable.
Top 10% of Income earners, Superstar Investors
Up to this point, we’ve been assuming an average investment return of 7%, which is still below the long term average stock return of close to 9%. And that’s just for plonking your money in an index and doing nothing more.
Fact is, if you can achieve just a few more points in investment return, of say 10%, than you’d be looking at returns of $2.5M by 50, and probably close to $8M by 60. Now that’s a pretty handy retirement! The fact is, achieving 10% long term returns is a pretty low bar. If an index fund, with a grab bag of business models and poor quality companies can get you a return of 10%, imagine what a little bit of diligence can do for your investing!
Top 10% income earner, superstar investor, aggressive saver
With a little bit of extra income, it’s highly likely that your average high income earner is probably able to put a bit more of their income away for saving and investing. If you are able to avoid lifestyle inflation, your spending doesn’t skyrocket as your income increases. You can bank more of your money, invest it and reap the rewards.
Pushing savings rates slightly upward to 50% plus can yield you some serious wealth accumulation. And as those kids leave the house, watch that savings rate rise even more with age.
A stretch goal by 60, I’d expect someone in this category to be able to walk away with a cool $12M. The big assumption is would you stick around and continue to collect a paycheck if you were worth $4M by 50?
High Income earning Power couple, Superstar investors & Aggressive savers
Up until this point, I’ve just been considering individual investors. Of course, many of us are in relationships or have partners who bring in a fair chunk of change. If there’s something better than a high income aggressive investor, it’s 2 high income aggressive investors! As a power couple, not only are you potentially doubling incomes, but you are probably able to boost savings rates well above normal as well.
This scenario is pretty unlikely to materialize, and if applicable, probably only to the top 0.5% of folks. It’s pretty unlikely these days that you’d get a power couple coming together in their early 20′s both in the top 10% of income earners, with a disciplined savings plan right from the get go that allowed them to save beyond 30% of their income.
In any case, they are generating excess income which is used to fund a fixed amount of expense. That excess income can go towards savings and investment. If such a couple were to even exist and come together in the scenario I’ve laid out, be disciplined with their savings and reinvest their savings, they’d be able to walk away with close to $20M by the time they look to retire. That is if they even choose to stay in the workforce till 60 .
Pretty slim odds of this happening, but its always nice to wish!
While the media is full of stories about folks who are on the way to a dreary retirement, the reality is that there are a substantial number of people who will likely be lapping it up, all the way to the bank, by the time they exist the workforce.
Additionally, the numbers that I have used for power couple incomes are probably also significantly understated. I know that there are a number of you reading this whose single or combined incomes are probably well above the numbers that I have used.
However the point is that even if you’re an average couple on average incomes, you should be on the way to a pretty substantial number for retirement. With some diligent saving and a willingness to have exposure the strongest businesses, you’ll be well on your way to walking away with a cool $1M+ by the time you exit the workforce. Of course, all this assumes that you are able to start your retirement planning early!
What do you think about my net worth assumptions? Are they realistic? Off the mark?