The upper middle class, aka the mass affluent, are loosely defined as individuals with a net worth or investable assets between $500,000 to $2 million. Some also define upper middle class as those who are college educated with incomes in the top 15% – roughly $100,000 or greater for households or $63,000 or greater for individuals.
The upper middle class is different from the rich because there’s a good chance everybody can achieve mass affluent status if they work and save for a long enough period of time. The mass affluent didn’t inherit their money, they earned it through hard work. On the other hand, getting rich often takes a tremendous amount of luck.
THE AVERAGE NET WORTH BY AGE FOR ALL AMERICANS
To calculate the average net worth for the upper middle class, let’s first look at the average net worth of all Americans. This data comes from the US Federal Reserve.
Here are some key takeaways:
1) Volatile wealth. There’s a huge 37% decline in the average American’s net worth for the same period (55-64 to 75+), which may signify that the average American isn’t as adept in making their money last into retirement. They are perhaps spending down their principal instead of investing their net worth in stable, income producing assets.
2) The average American starting out is struggling. For the first 35 years, the average American is struggling to make ends meet. They’re probably in school, paying off debt, and saving for a rainy day. There’s probably a lot of angst about never being able to get financially ahead in such a competitive and expensive world.
3) The average American does well later in life. The average net worth by age in America is actually quite healthy, contrary to popular belief that most Americans don’t save enough for retirement. Clearly, extremely wealthy individuals will skew the averages higher. But, the biggest surprise is the $843,800 average net worth figure for the typical American ages 55-64. That’s almost like saying everybody who is between the age of 55-64 is a millionaire!
This data should stand out as much as the incredible study which says that 100% of Americans who make more than $500,000 a year are happy. But the media doesn’t want to report on positive financial findings because poverty and suffering garners more traffic and advertising dollars. For the average American, their financial lives get so much better later on in life. Perhaps this is why older people are more relaxed, less insecure, and almost all agree with my own average net worth and 401k charts.
MEDIAN AMERICAN NET WORTH BY AGE
I can hear a cacophony of complaints about how absurd the data is by the US Federal Reserve regarding the average net worth by age. Don’t worry. I’ve already got a headache listening. Averages tend to skew the numbers higher due to a concentration of very wealthy individuals. Therefore, let’s take a look at the median and average net worth for Americans according to the Federal Reserve.
Median net worth by age provides for potentially a more realistic picture of the “average” American. The sweet spot for net worth amount continues to be ages 55 – 64, right before the traditional retirement age of 65. The curve of the median net worth chart, if we were to graph it, looks the same as the average net worth chart. By the time the median American reaches 75+, s/he has spent down 35% of principal.
Let’s look on the bright side of things. If you still have $163,100 in median net worth by age 75+, you’re probably going to turn out just fine, especially if you have long-term care insurance. If you don’t have long-term care insurance for the remaining 1-3 years of your life, you could be wiped out if you don’t have any family members to take care of you.
If we add on pensions or Social Security, is the “retirement crisis” really so bad? None of us have to live in expensive cities such as San Francisco, New York, Honolulu or Los Angeles during our non-working years either. We can hop on a bus to Iowa, Indiana, South Dakota, or Louisiana to allow our net worth to last longer.
For those of you who are really bearish about the financial health of the average American, or who feel upset because your net worth isn’t in-line with the upper middle class net worth figures, here’s a chart to justify your concerns. The chart below shows that the median US household has gone nowhere in the past 50 years!
Remember, when it comes to data, we can pretty much believe whatever we want to make ourselves feel better. We see what we want to see, in order to justify our actions.
THE AVERAGE NET WORTH FOR THE UPPER MIDDLE CLASS
Now that we’ve analyzed the data for all Americans with averages and medians, let’s look at the average net worth for the upper middle class.
The above average person isn’t drawing down capital to survive due to their creation of multiple income streams, smart asset allocation, discipline to consistently live within one’s means, and the desire to leave money for loved ones and charities who are in dire need of funding. The Financial Samurai ideology is to leave the world better off than when we first entered.
Finally, the financially savvy person understands the estate tax (death tax) doesn’t kick in until assets are over $5,430,000 for persons dying in 2015. Therefore, every single person might as well shoot for accumulating up to $5,430,000 to help other people. Anything earned beyond such an amount should be spent with great enthusiasm while alive!
JOINING THE UPPER MIDDLE CLASS
If you want to join the upper middle class per your age group, do the following:
1) Max out your 401k and/or IRA as soon as possible. Try and save an equal or greater amount in after-tax investments as well.
2) Think about the proper asset allocation in relation to personal risk. Your assets should be deployed in a way that aims to beat the risk-free rate of return by at least 2-3X. Stay diversified and never confuse brains with a bull market!
3) Voraciously read as much as possible about wealth management, investing, retirement, taxes, and other issues. Subscribe to Financial Samurai and other personal finance sites written by finance veterans. Don’t be afraid to seek professional financial help too.
4) Move to a part of the country where there is opportunity. Give yourself a chance to get financially lucky by coming to areas where there is robust employment and brain share. It used to take two months to cross the country. Now it only takes five hours by plane.
5) Buy a home that you can afford and own it for as long as possible. You’ll wake up 20 years from now and thank yourself for having something to show for all your monthly payments. Forced savings through principal payments may sound rudimentary, but most people don’t have enough discipline to save on a regular basis.
6) Don’t be afraid to seek professional financial help if you’re lost. Put it this way. The more lost you are, the more bang for your buck you get hiring someone to give you advice or manage your money.
7) Make sure you are properly insured: health, life, auto, house, and umbrella policy. Any number of bad things can happen that can easily wipe away your net worth.
8) Work and invest for as long as possible. “Time in the market is more important than timing the market,” as the saying goes. Half the battle is just surviving through all the ups and downs, which is why consistent dollar cost averaging and refining of work skills is important.
9) Once you’ve properly diversified your wealth, things start getting a little messy. Track your finances through Excel, or a free financial tool by Personal Capital in order to optimize your finances and make sure there aren’t any leakages. It’s hard to improve what you don’t measure.
10) Finally, think positively! Believe you deserve to be wealthy. Don’t let the government or naysayers keep you down. Use constant failures as learning points. Use rejections as motivation to prove others wrong. There’s so much money out there for the taking!
IS YOUR RETIREMENT ON TRACK?
Manage Your Finances For Free: The best way to grow your wealth is to track your wealth for free with Personal Capital’s free financial tools. That which is measured can be improved. I’ve been using Personal Capital since 2012 to track my net worth, manage my cash flow, and X-ray my investment portfolio for excessive fees.
Personal Capital also has an incredible Retirement Planning Calculator that uses your linked accounts to run a Monte Carlo simulation to figure out your financial future. You can input various income and expense variables to see the outcomes. I definitely recommend everyone sign up and see what their results say. You can use their software to track your net worth, reduce investment fees, and manage your cash flow as well.
Post updated for 2019 and beyond. The bull market is making investors wealthy and spenders poorer. Now tax reform is giving more Americans the ability to keep more of their money. Make sure you are on the right side of the equation.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
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